How to Filter Trade Opportunities for a Minimum Rate of Return

Hi everyone. And in this video, I want to show you how to filter trade opportunities for a minimum rate of return. This is a wicked cool feature that we built in to the automation platform here at Option Alpha And it’s really powerful if you can set up these bots to check for certain rates of return for positions before the order goes to your broker and this is really showing off the power of using automated trading and using bots to make these decisions and check this market data for you before it actually goes through and sends the order off to your broker.

So, in this case I’ve set up this demo automation to show you how to build in these filters for minimum rates of return and how to use these inside of your scanner automations that would be looking for new positions to get into. We’re just going to assume here for this particular video that all of your decision-making processes have been done before you actually get to the point of entering a new position. In this case we’re going to try to enter an open short put spread in SPY and you can see all of the different criteria here for this position that we’ve set are just simply here.

We just use all the defaults for this video, but you can set all your criteria for whatever positions you want to get into easily at the end of your automation editor. And in this case, we’re just going to check and see if the market is above 200 day moving average. Again, if you want to do all of your checks and all of your decisions before this, go ahead and do that before you actually get to the stage of opening a position.

Now what most people do is they simply go through and just open a position right away. But if you want to do some sort of trade filtering before you get to the stage of sending the order to your broker which we highly suggest you do. And make sure that the trade meets all of you criteria before you enter the position. Then what you can do is you can simply click on the open position action here and proceed this with a decision.

Now the reason that we like to do it this way is because once we add that open position action, we can then proceed it with a decision and re-reference that same opportunity inside of our list of opportunity recipes. Remember, opportunity recipes are just pulling data from the market and checking whatever variables or threshold you set before the trade gets pushed to your broker.

So, in this case, we’re going to check and see if the opportunity that we’re about to enter has a certain rate of return. And this is really cool because we can then use this as a threshold to make sure that we’re getting paid enough premium based on the amount of risk that we’re taking and the credit, or the debit that we’re paying that it meets whatever threshold we have.

In this case as a short put spread, example, we’re going to make sure that we have an opportunity rate of return that’s greater than some level of premium that’s based on the width of the strikes that we’re looking at and the premium that we would select. So, first thing we have to do is we have to select the opportunity that we want the bot to check.

Now because we’ve already put in this open short put spread position previously, the bots are smart enough to recognise that that’s a recent opportunity that you might want to check and in this case it is. You could also just create a brand new one here from scratch and check that as well if you want it to, but we want to pull in that same opportunity that we’re about to enter and check the data on it as we move forward. So, we’re going just to double check and re-confirm all of these and then hit save.

The next thing that we’re going to do is we’re going to go over to the next variable field which is just that the rate of return is greater than or less than some values that we’ll set next. In our case, we want to make sure that the rate of return, how much premium we’re taking in vs how much risk we’re putting up for the spread is greater than a certain threshold. And in this case, we’ll set that threshold at 30%.

Ideally, we’re looking for premium that is collected of around 30% of the width of the strikes including factoring in the spread breakeven point that we have on this position. This is a really, again, intelligent, smart way to let bots do all of this manual, tedious, processes that you typically would do by yourself even if you remember to do it, in some cases don’t check these or don’t remember to check these.

This way the bots always check this before you get into a position. So, the first thing that we’re going to do is try to enter the short put spread position with a rate of return that is greater than 30%. So, once we do this and this is our single decision that we want to put into this decision action, we simply hit save. Now that adds that decision action right before the action to open the position.

So as long as the SMP’s price is above the 200 day moving average, and the answer to that decision is yes. It would continue down the path and now it would check to see if the rate of return on the spread that we’re about to enter is greater than 30%. And if the answer to that question is yes, then it would send the order to the broker and actually execute the position. This is a really cool way to do and again you can test and verify this right here inside of your automation without leaving the automation editor.

We just go up here to test. We choose whatever bot we want it to run in for the test, and then we start the test. Now you can see that as it’s going down all the list of criteria it actually failed to have a rate of return that was greater than 30%. And this is great because now the bots are doing the filtering for you and are using live market data to make sure that you’re only entering and sending orders to the broker that meet all of your criteria.

In this case the SMP’s price was above the 200 day moving average. But when we went to this step to check and see if the rate of return was greater than 30%, we found out that the answer to that question was no. So we can click on it and we can actually see exactly what type of return we were getting, in this case, for the spreads. And notice it was considerably below our target of 30%.

This is great because what this allows us to do now is it allows us to let the bot run and continuously check for this every time it runs this automation through its intervals and see if at any point the rate of return and the pricing is above our threshold. And if it is, at that one moment in time when it runs then it would send the order through to the broker. Again, we can double check and verify this by just going in here and just changing any of these variables here and just seeing if it changes the way that the test is run. So we can reduce our threshold down to a 10% return if we want it to.

Go ahead and test this automation and then see what the results are. Now you can see that with a lower threshold, we actually got a yes answer to this decision block. So would’ve gone through this and it would have entered the open short put spread position in SPY. Again, it didn’t actually open this position, this is just a test scenario that it's demoing as it runs through it sets of the criteria so you can see what the bot would have done if you would’ve turned this into a live scenario situation.

So this is a really easy way, again, to test all of the different rate of return thresholds that you have for positions right inside of your bots in automations. That way you don’t have to remember to do it and you definitely don’t have to do all the calculations in your head or on a spreadsheet. You can just let the bots take care of all of that for you.

As always if you have any questions, let us know. And until next time, happy trading.