Strike Distance Condition

1. Purpose and Overview

The Strike Distance Condition supplements the Stop Loss of an individual Short Leg with an additional condition on the Underlying price. The goal is to avoid executions triggered solely by a brief, extreme option price spike (Slippage Event).

The Stop is no longer triggered by the option price alone, but only when the Underlying price is also close enough to the Short Strike.

During so-called Slippage Events, very poor executions can occur, where options that are far out of the money are stopped out at disproportionately high prices. The primary goal of this feature is to prevent such irrational price executions on far OTM Short options.

Important note: The Strike Distance Condition does not guarantee better execution. As long as the condition on the Underlying price is not met, the Stop is triggered later or not at all, and the position remains open. During strong market movements, execution can also be less favorable as a result than without this feature. See Chapter 11 for details.

2. Prerequisites

The Strike Distance Condition can only be used under the following conditions:

• The Leg is either a Short Put or a Short Call (does not work for Long Legs!)
• For this Leg, a Stop Loss is enabled and Use REL is enabled.

The feature is not intended for Long Legs, Combo Stops, or Stop rules on an entire Leg group. It is only available for individual Short Legs.

3. Basic Logic

With a normal REL Stop Order, the Stop is triggered as soon as the defined Stop Loss price of the option is reached.

With Strike Distance Condition enabled, an additional Underlying condition is set. Technically, this is implemented via a Conditional Order in the TWS. The Stop condition on the option price and the additional condition on the Underlying price are set as an AND logic.

The REL Stop Order is thus only triggered when both conditions are met:

• The option price reaches the defined Stop Loss
• The Underlying price reaches the calculated trigger threshold

This is intended to prevent executions where an option that is far out of the money briefly spikes in price, even though the Underlying price has not really reached the Short Strike yet. Additionally, the logic takes into account that options far out of the money are often less liquid, while liquidity typically increases the closer an option is to the money. The Stop should therefore only be triggered in a range where execution is more plausible from a market perspective.

The trigger threshold is not a fixed value. OptionsApp recalculates it every minute and adjusts the Conditional Order as soon as the value changes. If the value remains the same, the Order remains unchanged. Depending on market conditions, an adjustment can occur multiple times per hour or may not occur for hours. In any case, OptionsApp must be running and connected to the TWS. If it is closed or the connection is interrupted, no recalculation takes place.

Warning: Due to the additional Underlying condition, it is conceivable that in individual cases the Stop Loss may also be triggered later. This is particularly conceivable if the option price is already sustainably above the Stop Loss value, but the calculated trigger threshold on the Underlying has not yet been reached. If this threshold is only reached later, execution can be worse under certain market conditions than with a REL Stop Order without Strike Distance Condition.

4. Calculation Logic of the Trigger Threshold

This threshold, from which the REL Stop Order is triggered, is not entered as a fixed value, but is derived dynamically from the current option chain.

First, a reference price is calculated. This results from the defined Stop Loss of the Short Leg and the set Factor.

Example:

Stop Loss × Factor = Reference Price

With a Stop Loss of $5.00 and a Factor of 0.50, the reference price is $2.50.

OptionsApp then searches the option chain for the Strike whose option price is closest to this reference price. From this found reference Strike and the current Underlying price, a distance is calculated. This distance shows how far the market currently is from the range in which an option would reach approximately the reference price.

This distance is recalculated every minute. To prevent individual brief price peaks from immediately shifting the trigger threshold significantly, a median is calculated over the last minutes. The time period for this is defined via the parameter Median over.

The final distance results from the greater value of:

calculated Median distance
and
Min. distance

This final distance is then applied to the actual Short Strike. This creates the trigger threshold for the Conditional Order.

For a Short Put, this threshold lies above the Short Strike.
For a Short Call, this threshold lies below the Short Strike.

5. Parameters

6. Logic for Short Put

For a Short Put, the trigger threshold lies above the Short Strike. The Stop is thus only released when the Underlying price falls to this threshold.

The trigger threshold is set as follows:

Short Put Strike + Distance

Example:

• Short Put Strike: 6500
• Used Distance: 25 points
• Trigger Threshold: 6525

The REL Stop Order can only be triggered when the Underlying price falls to or below 6525 and at the same time the option price reaches the Stop Loss.

7. Logic for Short Call

For a Short Call, the trigger threshold is set below the Short Strike. This means the Stop is only activated once the Underlying price rises to this threshold.

The trigger threshold is set as follows:

Short Call Strike - Distance

Example:

• Short Call Strike: 6500
• Distance used: 25 points
• Trigger threshold: 6475

The REL Stop Order can only be triggered once the Underlying price rises to or above 6475 and simultaneously the option price reaches the Stop Loss.

8. Example with typical settings

The following settings are provided as an example only:

• Min. distance: 10
• Median over: 5min
• Factor: 0.50

Assume a Short Put has the following values:

• Short Put Strike: 6500
• Stop Loss: $5.00
• Factor: 0.50

This results in:

$5.00 × 0.50 = $2.50

OptionsApp now searches the Put option chain for the Strike whose price based on the Stop Loss trigger basis is as close as possible to $2.50.

Assume this reference Strike is at 6535 and the current Underlying price is at 6560.

The calculated distance is:

6560 - 6535 = 25 points

Since the Min. distance is 10 points, the larger distance is used:

max(25, 10) = 25

The trigger threshold for the Short Put is therefore:

6500 + 25 = 6525

The REL Stop Order becomes active only when the Underlying price falls to or below 6525 and simultaneously the option price reaches the Stop Loss.

The logic behind this:
The reference Strike 6535 in this example indicates the range where a comparable option is currently worth approximately $2.50. When the Underlying price later approaches the actual Short Put Strike by the same distance of 25 points, it is assumed that the Short Put, under otherwise comparable market conditions, should also be in approximately this price range. Since $2.50 in this example only corresponds to half of the Stop Loss of $5.00, there remains additional room until the actual Stop Loss price. Therefore, the REL Stop Order is activated only from this Underlying threshold onward.

9. Interaction with REL Order and REL Limit

The Strike Distance Condition does not replace either the Stop Loss or the REL Limit.

It merely supplements the activation condition of the Conditional REL Stop Order.

This means:

• The Stop Loss continues to define the option price at which a closure should be triggered.
• The Strike Distance Condition additionally defines the Underlying price from which the Stop is allowed to become active at all.
• REL Offset and REL Limit continue to determine how the closing order is executed price-wise. For more information, see: What is a REL Order?

10. Traceability in the Trade Log

The calculation of the Strike Distance Condition is documented in the Trade Log.

You can track there:

• which reference price was used
• which reference Strike was found
• which distance was calculated
• which trigger threshold was set for the Conditional Order

11. Notes and Risks

The Strike Distance Condition reduces the risk that a Short option is stopped out by a short-term option price spike with high slippage.

However, the function does not guarantee better execution in every market situation. A Stop may be triggered later due to the additional Underlying condition. As long as the Underlying price does not reach the trigger threshold, the Stop will not be triggered at all and the position remains open, even if the option price has significantly exceeded the Stop Loss. For multi-day trades, this can continue across the trading day. In case of strong market movements, this can also result in less favorable execution than without Strike Distance Condition.

The trigger threshold is only recalculated as long as OptionsApp is running and connected to the TWS. Without this connection, no further adjustments take place, and the last set threshold may no longer match the current market conditions.

The function should therefore only be used if the logic is fully understood and you are clearly aware of the associated risks. The effects of the parameters must match your strategy, the Underlying, the expiration, and your own risk management.