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Duration: 5:59

Instructor:

Contributor: Interactive Brokers

Level: Advanced

A spread order is a combination of individual orders (or legs) that work together to create a single trading strategy. In this Traders’ Academy lesson we’ll review how to enter these orders in TWS using Strategy Builder for Option Spreads.

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Study Notes:

A spread order is a combination of individual orders (or legs) that work together to create a single
trading strategy. In this tutorial we will review how to enter these orders in TWS using Strategy Builder
for Option Spreads.

To access Strategy Builder in Mosaic click on the blue New Window button and select Strategy Builder.

Or using the Order Entry panel click the dropdown box to the right. Select the Strategy Builder. Users
may create a spread manually by clicking on each option to be included in the combination. Or turn on
the Strategy Builder tool using the On/Off toggle beneath the option chains and select a predefined
Strategy from the dropdown menu.

Let’s start in the upper left corner and enter a new ticker symbol. You may also select a previously
loaded ticker from the dropdown menu. Strategy Builder displays Option Chains at the top and a
strategy testing area below. At the very bottom of the tool is the Order Entry area.

There are two displays for option chains determined by the List View and Tabbed View filter above the
option chains. Using the Tabbed View select your desired expiration – if you don’t see it on the tab, click
the More tab to the right.

Select each leg to be included in your spread by clicking on the Bid and Ask values. I will enter a vertical
call spread by clicking the Ask price for one strike and clicking the Sell price for a higher strike. Each leg is
added to the Strategy Builder window below.

Users can adjust details of each leg within the Strategy Builder window.
• Buy legs can be changed to Sell.
• Expirations can be changed.
• Strikes can be altered.
• And the user can delete an entire leg by clicking on the red X button to the left of each line.
• Use the Clear All Legs button to start over.

Notice that the Bid/Ask quote is displayed in the Strategy Builder and a Payoff diagram is plotted to the
right. Before you can submit an order, you must enter a price in the Order Entry screen below. The
default view is blank and requires the user to determine a price.

If you want to add a position in the underlying asset to your order, in the Order Entry panel click on the
“Advanced” button and select Add a “Stock Leg” to your spread.

If you want to add a spread to your Monitor, click the Add to Watchlist button to see the quote.
I will click the Clear All Legs button and demonstrate how the Strategies dropdown menu can help you
quickly select from a list of common predefined strategies. From the menu I will select the Vertical
Spread. Note the on-screen instruction, which includes the current spread value for the distance
between strike prices.

By hovering the mouse above a quote line, the software will select the remaining leg or legs of the
spread. Pay attention though, because the sophisticated tool will create credit as well as debit spreads
depending on how you start your option selection.

By hovering above the Bid/Ask price display, Strategy Builder will create vertical spreads using blue and
red highlights. Ensure that you have the order constructed properly. For example, for a debit call spread,
the buy leg is the lower strike and the sell leg is at a higher strike price. The Strategy Builder is designed
to create debit or credit spreads. Just move the mouse between the Bid and Ask columns to see how the
detail can be changed.

Note that any leg selection can be dragged by holding down the left mouse key. Widen the spread
between strikes by using the mouse wheel. When you are satisfied with the spread selection, click on
the quote line. The combination will be added to the Strategy Builder where it can be further refined.
The ratio can be adjusted, for example, or legs can be added and removed.

With your order refined and having selected a price for the trade, click the Advanced expand button. If
you wish to preserve a spread you have created, click on the Save button to add this to your Activity
Monitor. To view the impact of adding this spread trade to your account, click the Margin/Performance
button.

The Order Preview window shows Order Description, Amount and Margin Impact – in your account’s
Base Currency.

Under the Order Description, the Sell leg of the order is highlighted in red, and the buy leg is highlighted
in blue. Note the red “D” is displayed denoting that this is a debit spread. If the proceeds of an option
combination result in a credit to your account, the letter “C” highlighted by a green label would
populate the trade amount on the screen.

Check the box next to “Performance Profile” to show the Performance Profile side-window with Quote
Details, Performance Graph and Scenarios. This allows users to consider the profit and loss of a trade
over an up and down price range for the stock, while dates can also be selected from the calendar drop
down menu. Click the X when done or close the Order Preview window.

Review the order details in the Order Entry row of Strategy Builder and your order is ready to submit
using the Transmit button. Working and completed orders can be viewed in the Order tab of the Activity
panel in Mosaic. You can request order cancellation or make updates from the Order tab.

The Strategy Builder offers great flexibility in adding multiple options, and stock when desired, to an
order.

With a few mouse clicks you can quickly create and analyze the suitability of a complicated option
strategy before adding it to your portfolio.

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: Order Types / TWS

The order types available through Interactive Brokers LLC’s Trader Workstation are designed to help you limit your loss and/or lock in a profit. Market conditions and other factors may affect execution. In general, orders guarantee a fill or guarantee a price, but not both. In extreme market conditions, an order may either be executed at a different price than anticipated or may not be filled in the marketplace.

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.

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