I've Never Heard of a Strategy Tree? Yup, Because it's a First of it's Kind!
What is a strategy tree? Simple, the tree is a visual representation and strategy building tool that is exclusive to the Brutus Options Ranker. In fact, to our knowledge, this is the only visual strategy builder available in an options screener.
With this building tool you can create your own Brutus Options Ranker strategies. As such, the Strategy Tree is a key part of Brutus. It contains criteria in which alternatives will be evaluated against in order to best satisfy your trading objectives.
So What Does a Strategy Tree Look Like?
Below is a finished tree. Notice the nodes in the tree. It is organized in a hierarchy of the strategy's trading criteria (organized into groups). A market group and setup is specified for the strategy since the icons are green.
For this reason it is important to understand what the strategy tree looks like and how it operates. The tree is the backbone of the Multi-Criteria Decision Making (MCDM) process and define's the strategies hierarchy. MCDM is the common mathematical field which studies and describes Brutus' proprietary ranking algorithms. With MCDM, Brutus returns the rankings of those options trades that best meet your strategy criteria.
The Top of Your Strategy Tree Defines The Objective
Your Strategy Tree representation begins with your overall objective, and conveniently the name of your strategy. You'll find this at the top node of the tree as it sets the objective for all branches under its objective. You define your objective at the beginning when you establish your strategy. It is tightly linked to a specific setup you plan to trade with the strategy (i.e., At-the-Money Put Calendar Spread, Bull Put/Call Spreads, Bear Put/Call Spreads, etc.).
When you begin to construct your Strategy Tree, the objective will be the first node that you see. This will also be the name of your strategy, therefore we encourage you to be descriptive.
Properly naming your strategy, for example, by its objective will help you to stay focused when you build the strategy.
Building Your Strategy Tree Basics
Before we add criteria or grouping of criteria to the objective node, it's best to set your Market Group and Option Setup that will form the alternatives for ranking.
How to select a market group and option setup
First you need to select your market group and your options setups.
These two settings will define the associated options trades (alternatives for ranking) that will "flow" upward through the tree to test against your objective.
For example, you might be looking to collect income by selling short puts. A logical market group to match this objective would be to choose dividend paying stocks. In this case, even if you are assigned the stock in the event that the trade was unsuccessful, you will purchase the stock at a discount with increased dividend yield.
Desired setups are the types of strategies that match your market outlook. So for selling short puts, we would need to select the “Short Puts” setup.
Now It's Time to Start Adding Criteria!
Once you select your market group and options setup, you can select the appropriate criteria for which Brutus will base its decision-making analysis. You will notice that the criteria are organized in groups under the Criteria Panel. In a similar way, you can also define groups of criteria in your strategy tree.
Define Your Criteria Groups
Before we start dragging and dropping criteria into the tree, it's a good idea to think about how your trading criteria might be organized. A framework we suggest is what we call the "Min Risk, Max Reward, Max Liquidity" Framework.
To build these grouping, all you need to do is drag the “New Group” block into your tree. Upon adding the “New Group” to your tree, you can give it any name of your choice to represent your group.
Now We Have Logical Groups for Our Criteria. Let's Get Down to Business!
There are over 50+ criteria that you can add to your strategy for nightly scan/rankings. If you are unfamiliar with a criterion's definition, you can hover over the "?" help icon to the left of the criterion to learn more about it.
Our co-founder, Drew Hilleshiem, recorded a screen share taking you through the whole process. You can watch that here. It provides a good example to build up a short put strategy.
Once you find the criterion that is appropriate for your strategy, you can add it either to the objective or to one of the groups you establish by dragging and dropping the criterion into the tree. Pay attention to the level you place on each criterion in the tree, as only the criteria in the same level are evaluated and ranked against each other.
For example, if you add three criteria to a "Min Risk" grouping, all three of the criteria's score will "flow up" to give the grouping an overall score. This overall score of the group is then evaluated for trade-offs between other groups and criteria on the same level.
Not Familiar With A Particular Criterion - Don't Fear!
While selecting your strategy’s criteria, you can hover over the “?” for a quick definition on the listed criteria. More so, by clicking on the “?” a pop-up with a full definition will appear. The full definition will include helpful tips on how to use the criterion in the Brutus Options Ranker and related videos that easily explains the concept.
As you drag more groups and criteria into your Strategy Tree, you will see your tree begin to take shape.
Another key point is to understand that the trade alternative that you set will flow upward through your tree. This evaluates against all the criteria in the tree.
Remember: Criteria Are Evaluated by Levels in the Hierarchy
All of the criteria or groups on a single level in the hierarchy of the tree are evaluated and ranked against each other.
Let's Set The Initial Weightings Between Your Criteria
Lastly, define the weightings of your criteria by either clicking on one of the “?” buttons on the groups in your tree, or by using the “weight all” button on the left side. This will take you through a series of screens that will prompt you to provide the initial weightings of the criteria or groups against one another.
At this point your strategy is complete. You can preview results from the strategy on a limited dataset from 2 weeks past by clicking the 'run test' button at the bottom right.
Tip: Test Your Strategy As You Build
Running a test of your newly created strategy will give you a feel for the type of results you can expect on a daily basis. If you get back results that make sense then you can proceed to enabling your strategy. If not, go back and adjust your weightings and criteria.
We hope this article helped you to better understand the basic concepts of your Brutus Options Ranker Strategy Tree and that it will make you more efficient in building multiple strategies within your account. It's important to ensure you diversify your strategies to ensure a plethora of highly-ranked options trades to keep your portfolio healthy, balanced and fully invested.