Assignment. The very thought strikes fear into many options sellers. Before automated trading, it was difficult to manage a portfolio of expiring options positions. You had to track expiration dates and in-the-money options contracts. Now you can manage assignment risk with simple decision recipes.
For example, you can check if a short options contract is in-the-money. If the option is at risk of assignment and close to expiration, you can send an order to your broker to close the position immediately.
If the position is out-of-the-money and unchallenged, no worries, you can choose not to take any action and let the option expire worthless.
There are numerous ways to define if a position is challenged. You can also use a decision recipe to reference the option’s greeks, such as delta. For example, you can check if the short put’s delta is less than -0.50.
Remember, assignment risk is subjective, and it is impossible to predict if or when a position will be assigned. Still, it is nice to know your bots can keep an eye on positions for you and take appropriate action as expiration nears. You can even receive notifications for assignment risk.
In this video, I want to show you how to use your bots inside of Option Alpha to automatically manage positions for assignment risk.
In a previous video, we showed you how to just get notified of assignment risk if you want to get notified using the notification action inside of the automations. But this time, we want to build out an automation that automatically closes positions if we deem that we are at high risk of early assignment. Again, this can be all done automated inside of your bots.
First thing that we're going to do is simply add an action to first loop through all of our existing positions. Position loops are actually really cool because they allow us to monitor every single position and individually make decisions on any positions that the bot has.
Now, in this case, we're going to specify that we want this position loop to only look at short put spread positions that we have.
We can build out similar automations using the clone feature for [[an automation]] and make adjustments for different types of positions like short call spreads, iron condors, iron butterflies, etc.
And you probably want to do this because different types of positions might have different characteristics or qualities that designate whether it's going to be at risk of early assignment or not.
In this video, we'll just assume that we're trading for this bot, a bunch of short put spread positions inside of our portfolio. So we want the bot to loop through each of those short put spread positions and independently make a bunch of decisions.
The next thing that we want the bot to do is make some decisions. We can add decisions here that would reflect the likelihood of being high risk of assignment for those positions. So we can go down to our position level recipes here, and we can add some decisions like the position expires in a certain period of time.
Now, this isn't the only qualification for being at risk of assignment, and of course, assignment is still random, and we don't know when it's going to happen, but if the position is expiring or close to expiration, that means that there's a higher risk that the position is going to be assigned.
So the first thing that we can do is have the bot check and see if the position expires in less than a certain number of market days. In our case, we'll say less than three market days. That's the first decision we want the bot to go through. If the position does expire in less than three market days, then we want the bot to make another decision.
Again, you can make any decisions that you want. You don't have to use the same ones that we're using here. We're just giving you an example of how you can do this with your bots. But now we want to check and see if the position's underlying price is actually trading below our short put strike.
Again, if the position's underlying price is not trading below our short put strike, then there's really no risk of assignment, or the risk of assignment is very, very low.
So the next thing that we want to do is check and see if the position's underlying price is trading below our short put strike. Again, you can specify this for any position that you have. Just want to make sure that you're double-checking the short or long, call or put strike of that position, and how you're using this inside of your automation.
Again, we'll just connect that position input to whatever position the bot's looping through and then simply confirm everything and hit save.
So now we're going to check and see if the position is expiring in less than three days. The answer to that question is no, then the automation simply stops and checks again at the next interval. If the answer to that question is yes, then it's going to make a separate decision, another decision for that position to check and see if the underlying price is below our short put strike. If the answer to that is yes, then what we want to do is maybe have the bot make another decision.
We can have the bot even clarify and specify even more the likelihood that the position is going to be in the money or that it's going to be assigned. We can use this recipe here to make even greater specification for decisions. We can connect the position input to whatever position the bot's looping through. Again, specify that we want the bot to check the position's short put leg specifically. And this time, we can use one of our new leg properties.
Notice that for any leg, at any point inside of your automations, you can check a number of different properties of individual legs. Here we're telling the bot to look at the positions, short put leg, and we want to see if that short put leg chance of being in the money is greater than some value that we set here, like 70%.
So, this would help filter out those positions which are marginally being challenged by the underlying stock price.
Maybe the underlying stock price is a penny below the short put strike. Well, maybe that's not as great of a risk as of assignment. It's just marginally in the money, but here we can use some probability and logic that automatically gets calculated every single time to check and see if the short put legs chance of being in the money at expiration is greater than 70%.
Again, we can add this to our automation editor.
Notice, in this case, we've set up each of these decisions to happen in a very particular order. You can set them up like this or use a group decision if you want to inside of your automation. So at this point, if the underlying price is below our short put strike and if that short put leg has a greater than 70% chance of being in the money.
We might want to tell the bot to simply go ahead and just close that particular position. So we add a close position action to our automation editor.
At this point, now we've completely and 100% automated—the entire process for any positions that are at high risk of assignment. Now you can add this as a separate automation to any of your bots and add this throughout all of the bots that trades short put spread positions, or you can group and add these decisions into your already existing monitor automations.
But this logic that we presented here is just one intelligent way to go ahead and use bots and automations to manage and monitor any positions that you have for early assignment risk. And then go ahead and take any appropriate actions like closing the position when it meets your criteria and threshold.
This can be done 100% automated right inside of your bots.