Let's talk about spread execution

[spindr0]

Quote from hlpsg:

I have an idea concerning execution but I'm not sure if it's workable though. Would like your thoughts on this. I've never done anything like this so I really don't know what the feasibility is for someone trading retail.

IB allows you to place an order that is one tick better than whatever the current bid-ask is. I think this is how it works.

Say the bid-ask is 1.00 - 1.30, you place this order to buy, it'll be placed at 1.05. If you place an order to sell it'll be placed at 1.25. I assume IB will continually modify the price according to the current best bid-ask.

So this is my idea to get a good price on a spread. It has to be done using some method to automate the process, don't think it should be done manually. Say I want to sell a call spread, selling the 800 strike, buying the 810 strike.

First I put in the buy order for the 810 strike, for the sake of margin requirements. So using the special order that IB provides, it gets submitted at 1.05, hoping to hit someone's market order or someone willing to trade at that price. Once this order gets filled, I setup the order to immediately trigger another order to go short the underlying to even out my deltas to keep me delta neutral till my other order gets filled.

Now I place the order to sell the 800 strike. I do one tick better than the current ask price. Once this order gets filled, I buy back my shorts.

I will probably get a good fill for my spread, but I did some calculations with /ES, and to balance out my deltas, I had to trade quite a lot of futures, and the slippage in the futures plus the futures commissions would probably more than wipe out whatever gains I got from trading the spreads this way.

Any ideas or comments?

You buy the 810c and short the UL to be neutral. The 810c has a lower delta than the 800c. If the UL drops, the 800c's delta drops more than the offset number of short shares makes.

For example, say the respective deltas are 60 (800c) and 50 (810c). Buy 810c and short 50 shares. UL suddenly drops 5 pts. 800c loses $3 and short shares gain $250. What now? Take the small (if any) profit on the pseudo straddle?

Even if the moves are small, slippage and commissions are going to kill you.


Legging in can provide greater reward but also has greater risk. The short answer is stick with the spread order especially if you're chasing a 5 cts better fill.