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Duration: 12:06

Instructor:

Contributor: Interactive Brokers

Level: Intermediate

Learn how to cover closing simple long or short positions as well as rolling positions from one contract month to another. This lesson will teach you how to create spreads for futures and we will cover setting up calendar spreads to trade or monitor.

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Study Notes:

TWS Expiration and Contract Roll

In this final introductory lesson to futures trading, we will cover closing simple long or short positions as
well as rolling positions from one contract month to another. This lesson will teach you how to create
spreads for futures and we will cover setting up calendar spreads to trade or monitor. Finally, we will
also introduce you to IB’s SpreadTrader, which allows more active traders to configure a matrix of
calendar spreads to help monitor a variety of markets and to easily trade into or out of futures positions
across available maturities.

Exit Open Position – Let’s start with closing a long or short position. Click on the futures contract from
your monitor window or load the ticker symbol in the Order Entry panel. You will easily see that your
position size is conveniently displayed alongside the quote and above the Quantity input field. To close a
long position, click the SELL button and click the quantity field. You may choose the Position from the
wand if you prefer to close the entire order at once. And then simply decide what order type you will
use to close the position. Select the time in force and when you have verified your inputs, you are ready
to send the order to the exchange by clicking on the Submit button. Click Transmit on the Order Preview
ticket. The working order will appear in the Order tab in the Activity window. To close short positions,
start by clicking on the BUY button in the Order Entry panel and follow the same procedure to close the
position.

Roll Position to Later Expiration – Heading in to futures expiration, some traders may wish to maintain
exposure to their positions. If that is the case, you will need to roll from one month to the next. For
example, you may be long of December expiration corn contracts, but decide to roll out to the March
future as expiration approaches. In order to do this in TWS you must first set up a generic combination
order. We will do this in the line below the December quote and position line. Enter the ticker for corn –
ZC – but rather than making the selection for Futures, hover your cursor above the Combinations
expansion line and select Futures Spreads (SMART). This choice pops up the Combo Selection Tool
populated for the ZC corn futures contract and defaulting to Calendar Spreads in the Strategy drop down
menu.

Looking to the left of this tool, use the Front selection list to locate the month that you have a position
in. Note that you can review more expiration months by using the scroll bar to the right of the months
listed. Here I will click on the December expiration. There are two ways to drill down to the desired
calendar spread. You may either locate it from the expirations listed below in the Back month box. Or,
you can select from the Duration box below. If you recall, we said we wanted to roll this position from
December to March, which is a three-month gap. Having selected the front December contract, if I now
select 3-months from the Duration list, the single December March calendar spread will appear in the
Combination window.

It is very important to note the convention TWS uses to treat these spreads. In the Strategy column you
will see the spread’s design. The convention for the calendar spread involves the SALE of the front
month and the simultaneous PURCHASE of the back month. This method assumes that an investor is
rolling from a LONG nearby month into a deferred contract month, requiring a sale of a nearby
expiration and purchase of the further month.

And so if you are long and want to roll a futures contract, setting up a BUY trade for a calendar spread
will correctly roll your position. For short positions, an order to SELL the calendar spread will create a
purchase of the nearby contract and simultaneous sale of the deferred contract month.
Clicking on the line will then allow you to add it to your Mosaic monitor. You may also see the message
now appearing on the screen. If you know your contract codes for calendar expiration months, you can
quickly enter spreads into the monitor panel instead of navigating the Combo Selection tool.

Clicking on the Ask button will create an order to sell December and buy March contracts. Usually,
contracts with later expiration dates are more expensive than nearby ones. In this case, the quote for
the spread will display positive values and the trade will involve a debit or a cost to the investor.
Logically, the investor is paying a higher price for the far contract to move the position from the less
expensive front month. Click on the Advanced button to view the Order Preview window and note the
red D for Debit listed on the ticket to confirm this. There may be occasions when you will see a green C
for Credit listed. This will happen under two circumstances.

1. When the contract price for the deferred contract is less than the price of the nearby contract
2. When the investor is rolling a short position and is BUYING near – the less costly contract – and
SELLING far – the more expensive contract.

This can be shown by reversing this order from BUY to SELL. Click the advanced button and select Check
Margin. Follow the onscreen explanation of the mechanics of this trade, noting the green C for Credit.
Notice also that the price quote doesn’t change from positive to negative – it stays the same.
Let’s submit the original order, click transmit from the Order Preview window to add this to the Order
tab on the Activity window.

You may add spreads to your monitor, or create a new watchlist to do so. Here, I have entered several
spreads to monitor and you will see that when I click on each, the chart populates to display the price
value of the spread. This helps investors track spread performance easily over time.

TWS SpreadTrader – For those traders wanting to monitor multiple calendar spreads across a certain
futures contract, the SpreadTrader is a convenient tool. From the blue New Window button to the top
left of Mosaic, locate the More Advanced Tools expansion menu and find SpreadTrader. Click to open
the software and you will notice tabs across the top of the tool. This allows you to follow spreads across
multiple markets. Enter the underlying ticker symbol for the futures contract you wish to create a
spread matrix for. Select the desired futures exchange. This opens a Futures Spreads Configuration box.

To the left you will again see display panels containing Front and Back expiration months and a Duration
panel. Notice the number of available months is displayed to the right of the words Front and Back. The
number to the left will change as you increase or decrease the fields to display in the matrix. The matrix
will display the selected front contracts along the top and the Back contracts down the side.

Let’s highlight ONLY the Front contract to start with and then take ALL available expirations for 2018.
Note the Strategies listed to the right indicating -1 for the front and +1 for the back with respect to buy
and sell for each strategy. The number of months spanning the spread is listed under the duration.

Click Finish and you will see that price quotes for the selected expirations are displayed in the Quote
Panel. Lower down the page you will see the Matrix with Bid and Ask Prices as well as volumes for each.
In this example, we have only the front contract displayed across the top row, with its spread prices
relative to deferred expirations listed in the left column. You can easily see spread values for this
[January] contract versus March, May July and so on as is listed down the side.

Use the Future Wizard across the top of the tool to change the selection of included spreads.

This time I will add the second two Front contracts in order to display spreads for these contracts versus
the remaining deferred expirations. As I add the second Front contract, you will see the available
spreads added as Strategies in the dialogue box. Watch what happens as I add the third Front contract.
You can return to the Futures Wizard at any time to add or remove spreads over time. Click Finish to
close the wizard and return to SpreadTrader. Now you will see across the top row the desired selection
of contracts you are spreading against. Notice to the right there is a slider to help you enlarge or reduce
the viewing area.

Clicking on spread Bid or Ask values will create orders on the Orders tab above the matrix view. From
there you can adjust Action, Quantity, Time in Force, Order Type and Price. When you are satisfied with
your order, click Transmit to create an Order Preview and then you can Submit your order to the
exchange. If you wish to remove unwanted orders from this area, click-right and select Cancel. You will
see tabs to the right of the Order tab for a log of order entry and trade revisions as well as completed
trades and a tab of related portfolio positions.

Having watched this lesson you should now know how to close open futures positions as well as how to
create orders to spread contracts between months. For investors monitoring and trading the shape of
the futures curve for a specific product, the advanced SpreadTrader tool allows you to custom-build
spreads and is a useful tool for monitoring the market.

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: Futures Trading

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.

Disclosure: Stock Symbols

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

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