COMING SOON. BETA ONLY FEATURE
Guardrail (Volatility Spike Protection) adds an SPX price condition to REL stop orders to help protect against extreme slippage caused by short-lived volatility and liquidity spikes. (This feature is only available at IBKR.)
How does it work?
A normal REL stop is triggered when the option reaches its stop price. With Guardrail enabled, two conditions must be met:
- The option price reaches or exceeds the normal stop trigger.
- SPX crosses the applicable Guardrail level. (Below the Guardrail price for puts or above for calls).
The Guardrail is calculated from:
- Point A: SPX price when the position is opened
- Point B: Strike price of the short option at market close
The Guardrail gradually moves from Point A toward Point B as the trade approaches market close. TAT divides the remaining trading day into 12 levels and save them in REL conditions.
Example
For example, if SPX is 7,500 when the position opens and the short put strike is 7,450:
- Shortly after opening, SPX must be below approximately 7,500 (7,510 with 10 point offset) for the stop to trigger.
- Just before market close, SPX must be below 7,450 (7,460 with 10 point offset).
This helps prevent a temporary option-price spike from triggering the stop when SPX has not moved sufficiently toward the short strike.
TAT Template Settings
TAT provides two settings to make the Guardrail more conservative:
- Offset at Trade Open (Point A) - adjusts the starting Guardrail level.
- Offset at Expiration (Point B) - adjusts the Guardrail level at expiration.
Both offsets can only have positive values. The offsets are applied in the direction that makes the Guardrail more conservative and trigger earlier. The default values for both offsets is 10 points. With a 10 point offset, in our example above the guardrail level would start at 7510 after trade opening and end the day at 7460, for a 7450 short put.
Put vs. Call Behavior
The Guardrail logic is mirrored for puts and calls:
- Puts: SPX must be below the Guardrail. A positive offset moves the Guardrail higher, making the condition more conservative.
- Calls: SPX must be above the Guardrail. A positive offset moves the Guardrail lower, making the condition more conservative.
FAQ
What is the purpose of Guardrail?
Guardrail is designed to protect against rare, extreme slippage events caused by sudden volatility spikes and temporary liquidity evaporation in the option chain. These events may occur only a few times per year, but can cause exceptionally large option-price moves and significant slippage, particularly for well-OTM options.
What if the option reaches the stop price but SPX has not crossed the Guardrail?
The stop will not trigger. Both conditions must be true.
What if SPX crosses the Guardrail but the option has not reached its stop price?
The stop will not trigger. The option-price condition must also be met.
Could this cause larger slippage on stops than before?
While the goal of Guardrails is to avoid extreme slippage events, it is possible that some stops could have larger slippage than they would otherwise. A Guardrail order requires SPX to have breached the guardrail level in addition to the option reaching the stop price.
It is possible in the event of large increases in volatility and options prices, without a corresponding move in SPX, that your option might move beyond your stop level before the Guardrail is breached. If this is a temporary issue and option pricing normalizes, this is the exact situation that it is designed for. However, if option premiums increase substantially and stay elevated and then SPX breaches the Guardrail level, your stop may be significantly higher than the stop trigger amount at that time. Raising the offset level for the Guardrail will help lower this risk.
Will TAT constantly replace the Stop order to set new Guardrail levels?
No. All Guardrail levels are calculated when the position is opened and are included when placing the stop order. The stop order is not continuously replaced throughout the trade.
What brokers support Guardrail (Volatility Spike Protection)?
Guardrail (Volatility Spike Protection) is currently only available at IBKR, due to the complexity of the order conditions required. We are investigating other, similar approaches with our other partner brokers.
Why are there 12 Guardrail time buckets?
The Guardrail changes throughout the trade, but REL orders cannot continuously update the SPX level. We therefore divide the time remaining until market close into 12 equal buckets, each with a predefined Guardrail level.