This lesson will discuss the Pegged Volatility order type which may be used to place orders to buy and sell options according to volatility levels associated with option premiums. We’ll walk through Pegged to Primary, Pegged to Market, Pegged to Midpoint and Pegged to Surface order types.
When we look at market quotes for stocks and options, most are priced in dollars and cents. However,
many option traders think in terms of implied volatility, sometimes referred to as IV for short. Implied
Volatility is the option trader’s estimate on how much the stock might move in the future and is a major
component of most options premiums.
Option traders care about rapidly changing volatility readings because of their implications for the price
of an option.
The Pegged Volatility order type may be used to place orders to buy and sell options according to
volatility levels associated with option premiums. Rather than specifying a dollar-and-cent-based
premium amount, the trader can create orders for options based on implied volatility readings
associated with prevailing IV readings in the market at the time the trade is placed. These new order
types provide traders with greater control and are able to make orders more or less aggressive by using
positive and negative offsets.
IB offers several variations of the Pegged Volatility order type, allowing the investor varying amounts of
control over the aggressiveness of the order.
Users may view options premiums expressed in volatility terms in IB’s Option Trader by changing the
setting under Option Chains. From the dropdown menu check Show Volatility. Now see the Bid/Ask
display shows daily or annualized implied volatility as opposed to the raw premium typically shown.
Choose an option to trade. You will see Bid and Ask and Last traded prices all displayed as implied
volatility readings. Let’s click on the Ask price to generate an order to buy a call option and click on the
Bid price to generate an order to sell a call option.
From the Order Type field select from the four Pegged Order types. For this example I will choose the
Pegged-to-Primary Vol order.
See what happens to the value for your Limit Price, which converts the implied volatility reading back to
a dollar-based premium.
Note the BLUE V in the Time in Force field to denote that you are creating a Volatility Order.
Orders may be made more aggressive by entering a value in the Offset Amount entry field before
submitting to the market using the Transmit button.
By entering zero for the Offset Amount, the premiums shown reflect the raw market price. But by using
an offset amount, you will notice how the Limit Price changes to reflect how aggressive you may wish to
be with your order.
Pegged to Primary – The order is pegged to the same side so that when buying options the order is tied
to implied volatility matching the Bid, while sell orders are pegged to volatility of the Ask price. In both
cases the order can be fine-tuned by using the offset action to become more aggressive than the
Pegged to Midpoint – Here, the starting price for buy and sell orders is the midpoint implied volatility
reading between the Bid/Ask spread. As this is a mid-market average volatility reading, the target price
can be made more or less aggressive by using the offset feature.
Pegged to Market – Unlike the Pegged to Primary style, this version pegs the option order to the
opposing side. For orders to buy call options the price is pegged to the implied volatility reading on the
Ask, while for orders to sell options the price is pegged to the implied volatility reading on the Bid.
Orders can be made less aggressive using the offset functionality.
Pegged to Surface – Starting prices are pegged to the model implied volatility calculated by our Model
The Model Navigator enables users to make edits to implied volatility readings for specific option
expirations across various strike prices.
The changes will result in new model prices for options. These can be displayed in TWS OptionTrader.
And the Pegged to Surface order type enables users to create option orders incorporating their own
custom view on implied volatility.
Buy orders are pegged to MODEL implied volatility readings on the Bid price and Sell orders pegged to
MODEL implied volatility readings on the Ask price.
For more information on the specifics of this order type, remember to look at the TWS User Guide
available on the IB website.
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.