With an underlying symbol loaded in the Order Entry panel, locate and select from the dropdown menu to the upper right, the Strategy Builder. Upon opening you might notice that this looks identical to the Option Chain window. You are correct. The difference is simply that the Strategy Builder on/off button is set to on. That means that by interacting with one or more options legs will not close down the window. Rather, by remaining open, you may add and subtract multiple legs to the Strategy builder area below, and when ready, create and submit orders for execution without leaving the open software. In addition, you can access multiple prebuilt strategies and easily select your desired strikes and expirations.
Adding Combinations – Let’s start by populating the Strategy Builder area manually. First, select the desired expiration date using either the tabbed or list views. In this example I will build a vertical call spread. In order to populate the Strategy Builder area below, all I have to do is click the bid or ask price for each required strike. Remember, clicking the bid price will by default create an order to sell, while clicking the ask price will create an order to buy. So for this vertical call spread, or debit spread, I will click the ask price of an out-the-money call option and click the bid price of a higher strike call option. Both legs will migrate to the Strategy Builder area. Note that you can see where you clicked in the Option Chain area.
Each of the strikes is displayed as a separate line item and quoted. Note that the combined quote is also displayed along with the Greek values.
- If you wish to add a leg, just click back in the Option Chain area.
- If you want to delete a leg, click the red X button to the left of that leg.
- If you want to change from buy to sell, just make the selection from the Action dropdown menu.
- Likewise, change the ratio for the spread by entering a different value in the Ratio column.
- You can change the strike price using the Strike column,
- And you can change between Call and Put if you like.
- If you want to start over, click the Clear All Legs button.
If you wish to view a combination in detail, use the Profile button to display a plot through expiration including Greek values. We’ll cover this in more detail in another lesson). If you want to build and monitor multiple combinations, you can add it to the current Watchlist by clicking the Add to Watchlist button.
The Order Entry panel at the bottom of the page will update with the item you are building in the Strategy Builder area. Change your quantity, price, order type and time-in-force as required and use the Submit Order button to the lower right of the window to create an Order Confirmation before Transmitting your order.
Use the Clear All Legs button to start over, and we’ll take a look at the commonly used predefined strategies available within the tool. Before starting, just ensure that you can see the legs you want to use in a combination displayed on the page. Click the dropdown arrow to the right of the Strategies button to reveal available combinations.
I will select the Vertical Spread. You will see an instruction on the screen. Hover your cursor above the bid value of the higher strike call you want to sell. By doing so, the software will highlight the opposing leg of the spread. Use the mouse wheel to widen and narrow the required spread.
When you are hovering above the appropriate strike prices to populate your combination, click on one of the legs to populate the Strategy Builder window. If satisfied, you may adjust price, quantity, order type and time-in-force as necessary before submitting the order.
Covered Call and Buy Writes
One popular combination is a buy write or covered call, in which an investor buys stock and sells or writes a call option at a strike price above the current price of the underlying. The general aim is to receive the premium income through expiration of the option and perhaps use the strategy to exit the long stock position by having it called away upon expiration.
- To create a covered call, open the Strategy Builder and ensure that the button is set to ‘On’.
- Locate the call option you wish to sell. Since you are writing or selling the call option, click on the bid price.
- The option loads into the Strategy Builder area.
- Locate the Advanced button at the bottom of the window.
- Click the expansion button and select ‘Stock Leg’.
- TWS will compute the appropriate number of stocks relative to the selected number of options. Generally, a single option contract covers 100 shares.
- Contract the Advanced button by clicking on the red X icon.
The stock and call option combination is now displayed in the Strategy Builder. The combination price is shown as the stock price less the premium received from selling the option. Adjust the quantity, price, order type and time-in-force as necessary. Note that if you initially entered a single option and added the stock leg of 100 shares, whatever you enter will magnify by that same ratio. So, for example, entering 10 as your quantity would result in 10 call options and 1000 shares.
If you are ready to enter your order, click the submit button. You may also add the order to a Watchlist or may preview the performance profile with those additional buttons below the combination price.
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Supporting documentation for any claims and statistical information will be provided upon request.
Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.
Disclosure: Options Trading
Options involve risk and are not suitable for all investors. For more information read the “Characteristics and Risks of Standardized Options” also known as the options disclosure document (ODD). To receive a copy of the ODD call 312-542-6901 or click here. Multiple leg strategies, including spreads, will incur multiple commission charges.