Filter for Tight Bid-Ask Spreads
Tight bid-ask spreads are a sign of highly liquid securities and provide traders with efficient pricing. With bots, you no longer need to manually search for optimal spreads. Bots actively scan a ticker’s options pricing and will not send an entry order if the spread is wider than you prefer.
The decision recipe for comparing a ticker’s bid-ask spread allows you to reference the current bid-ask spread before moving through an automation. You can use the recipe to prevent the bot from trading illiquid strike prices and specifically tell the bot the maximum bid-ask spread you are willing to trade.
For example, you can input criteria so a trade is not entered if the spread is wider than $0.05.
The bot pulls current market pricing to ensure that the bid-ask spread is not too wide before sending an order to the broker for execution.
For example, if the spread is above $0.05, the automation will end and wait to evaluate the spread width at the next interval.
You can always test the automation. The test will immediately let you know if current market conditions have the desired bid-ask spread width and show you the current spread width for comparison.
Decision recipes provide you with an intelligent way to ensure you’re trading what you want and lets the bot automate the tedious process of monitoring attributes for you, such as the bid-ask spread.
This video is another creative example of how you can leverage bots’ power to make decisions based on your detailed criteria.
Hi everyone. In this video, I want to show you how to filter for tight bid-ask spreads inside of any automations that you're going to be running through Option Alpha for your bots.
There's a really cool and powerful resource at your fingertips to let the bots check for appropriate levels for bid-ask spreads that meet your thresholds or your criteria before continuing down the path of actually executing trades. It's a great stop gap and a great way to filter out illiquid options or illiquid strikes and prevent the bot from trading those just using a very simple decision recipes.
So, I want to show you how to do that here in this video, and then we'll test it out here together so we can see how it works.
In this case, we're going just assume that you've done all of your decisions and all of your actions to get to the point of actually trying to make a trade. So, I only added one here just to use a very small space inside of our automation editor where we're just checking to see if SPY's IV rank is above 50.
That's the threshold criteria that we want to use. Again, whatever set of decisions or groups of decisions you want to use, you put those up here at the top. Then when you get to the point of actually entering a position, what a lot of people do is they'll go in here to add another action and simply open a position.
And there's nothing wrong with going in here and adding an action to open a position and setting up all the criteria for that particular position that they want to get into, it doesn’t do anything except immediately try to open the position.
So, you have your symbol, and your expiration, and all of your deltas and your contracts, etc. and once you add that to your automation editor, you'll see here that whenever S&P's IV rank is above 50 it would immediately try to open the short put spread that we have defined here: 30 days, 0.30 delta, 0.10 delta, etc, and that's fine.
But what if you actually wanted to filter for liquidity? What if you wanted to make sure that whatever position you were potentially going to open or entering had the appropriate bid-ask spread levels that meet your threshold for liquidity?
Maybe it's a tight spread, maybe it's a certain dollar amount spread that it has to be under, that would designate that it has enough liquidity or that the spreads are tight enough for you to actually want to get into the position.
So, we see this often with bots that are being entered into a platform that a lot of people are just entering these positions here, but they could take advantage of this really cool recipe to check for bid-ask spreads.
So, what you want to do to check for the bid-ask spread or a liquidity level is just simply go up to the settings of the open position action here and you want to proceed this decision with another check, another decision, to look at the bid-ask spread of a potential opportunity.
So, there's this recipe down here, and again, you can group a bunch of recipes together and include this with it, but for the sake of this video and keeping it really simple and targeted, we'll just use this one simple recipe. This is going to check for the opportunities bid/ask spread being less than or equal to or greater than in some cases if you want it to, whatever value you put in here.
Again, this is a really smart, intelligent way to make sure that you're trading exactly what you want to trade and let the bots do the manual tedious process of monitoring these spreads for you.
In this case, the first thing that we have to do is we have to select the opportunity. This is the potential trade that the bot might get into. Again, this is just a check. This is looking at the data for a particular position.
And in this case, the bots are smart enough to recognize that you potentially have an opportunity right here that you had just tried to enter or added to your automation editor. So, it's smart enough to recognize that, hey, maybe you're talking about this position right here and it allows you to just simply click that position without having to re-enter all of the information step by step.
It's again a really intelligent way to do it. You can choose a different one if you wanted to. But then you would want to make sure that you appropriately change that other open position action that you have down below.
So, in this case we're all going to check that same short put spread. This is the 30 day, 0.30 delta, 0.10 delta put spread on SPY. And we simply go ahead and save it.
The next thing that we have to do is we have to go over to the next variable field which is choosing to check and see if the bid-ask spread is less than, more than, or equal to some value. In most cases, you'll probably use less than some value because you want to make sure that the spreads are pretty narrow. And here in the variable or value field you can just type in how narrow you want the spread.
It could be $0.05 cents, it could be $0.03 cents. If you're trading some other products or some other symbols where you know these spreads are a little bit wider just naturally, then you could type in $0.10 cents.
So, whatever you put in here that's what the bot is going to check for. It's going to make sure that in order to continue down the "Yes" path that would eventually lead it to opening the position, that the bid-ask spread that the exact moment is less than $0.5 cents. So we'll just use $0.05 cents as the current threshold here.
Once we hit save, it's added to our set of decisions, and then we just hit save again to add it to our automation editor.
Now when the bot starts running and this automation runs, it's going to go through all of the checks to get to the point of potentially starting to open a position, but before it actually sends the order to your broker to open that position, it's going to pull the information for that particular trade that you're about to enter and just make sure that the bid-asks spread is less than $0.05 cents.
Again this is a really smart, intelligent way to do it. You can couple this with the other filters like we've shown in other videos like volume or liquidity or certain amount of open interest for different strikes. You can do all of that here inside of one block or space them out into other decision blocks if you want to. But in this case, it's very easy just to always use at least a bid-asks spread filter. And in this case, we're going to check and see if it's less than $0.05 cents.
So, if the bid-ask spread of that short put spread is greater than $0.05, and the answer to that question is no, it would continue down the no path and then simply end. It would not enter the position or send the order to your broker. And this is great because it can check it again at the next interval and maybe at the next interval there's more liquidity during the day and it's a better opportunity to enter that position.
So, what we're going to do is we're going up here and we're going to test this automation. Now before we do that, just really quick, so that the automation goes through, we're just going to change this IV rank threshold here just to 1. This way we know for sure that S&P's IV rank is above 1.
That gets us pass this first check point here and we can really hone in on testing this particular step inside of our automation editor. So, we're going to go up here to test. We just can select any bot that we want to test this in.
It just gives us the ability to run the automation, then we start the test.
So of course, you can see when the test started with went through the first check point very fast. And then it got to the second checkpoint, the decision to check and see where the liquidity is and the answer to that was no.
So in this case we can test this out. We know that right now when we're using live data at 12:18 in the afternoon when I'm doing this video, that the liquidity is not at a level in the bid-ask spread is not tight enough as we've defined it here in order for us to have potentially gotten into a position.
So if we want to see exactly where the bid-ask spread was, we just click on that actual decision recipe and you can see inside of the decision log exactly where that particular spread was.
So now we know the spread was $0.17 cents. And our threshold was it had to be under $0.05.
Again, this is really good because now the bots are stopping trades before they actually get sent to your broker. The bots are doing all the decision making for you by going through the data and come in through the data at every single interval to make sure that ,before the order get sent to your broker, that all of the criteria and threshold that you've set for the possible position that meet your risk tolerance or your risk profile are appropriately done.
So in this case, we can go back here and we can just edit this and see if it actually works if we increase the tolerance to something a little bit wider. So, let's go up to say $0.20. This should go through almost immediately as far as the test goes, so, we should see that if the spreads are around $0.17 or so. We could run this through and just verify that it's actually working correctly.
You can see we ran this now and because our threshold was moved up to $0.20 just for the purpose of this test, now we can see that the bid-ask spread at the exact time that we ran this was $0.15.
So, we know that the bid-ask spreads are fluctuating somewhere around $0.15 - $0.17 for this type of position, and that's good because if our threshold is $0.20 cents and if we're willing to get into things that have pretty wide spreads not that we would get on the either side of that spread, then it would potentially open the position.
Again, this is just the test. It's not actually opening the position, but it's telling you what it might potentially do and the strikes that it might potentially enter as it runs through a scenario.
This is really cool because now you can verify and check all of these things before you actually get into your positions and turn on your bots.
So that's how you do it. That's how you add your bid-ask spread filters to your automations.
It's really cool way again to go ahead and let the bots do all of the manual, tedious, process that you're normally used to doing if you remember to check bid-ask spreads before you get into positions.
As always I hope you enjoy these videos. If you have any questions, let us know. And until next time, happy trading.
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