Questions regarding fills on vertical spreads/combos

[codeine]

I am certain my ignorance will be fully displayed here, so bear with me..

MU $39.33
I wanted to trade in this manner:
Sell Oct-6 39.50 put @ 0.99
Buy Oct-6 38.50 put @ 0.55

With my broker (IB) this is entered as a "Buy Combo" order, and the difference between the two values becomes your Limit price. (0.44). However, I entered this order before the open this morning (which I now realize was a mistake), and it was filled thusly:

Bought Oct-6 38.50 put @ 5.00
Sold Oct-6 39.50 put @ 4.90

Based upon my confusion with this, clearly there is something I don't understand about the way combo orders are handled/executed.

How does one enter a credit spread order, specifying the prices that you wish to buy/sell the individual options for, instead of just specifying the spread price, and receiving undesired fills at less than the Limit price entered?

I understand that one could execute legs individually using Limit orders, but if you execute the buy order first, and the sell order as a conditional order that executes if the buy order executes, would the broker understand this to be a combo trade that way? Or will the second order, the write, have to be cash-secured? (Value of strike x 100).

 

[tommcginnis]

Nothing to do with IB or your understanding of spreads (although, for practice, you should write the combo in as many ways as IB/TWS offers, as each has a different take on "default" and you need to learn/know that ASAP), but has to do with the market.

Check the market for similar spreads tomorrow morning, and you'll find, for a 40¢-50¢ spread at 10:30am, instead a bid-ask spread of 5¢-95¢ in the weaker hours. Same "mid"!! But......

 

[beerntrading]

@tommcginnis he's showing a spread in the neighborhood of $4 on the fill he got. This looks like a market order to me (and seriously, IB accepts market orders on spreads to be placed on opening?!)

Did you enter as a market order? Net Credit Order. That's the short answer. It's a song sung so many times before, never enter multi-leg options on a market order.

Beyond that, you had a few things working against you.
The first is trying to trade while the market is still illiquid. I'm not aware of any strategy more dependent on liquidity than multi-leg options. When I trade spreads, I prefer to trade in the middle of the day--the options markets have stabilized, and the relatively low volume on the underlying keeps most big price moves at bay.

Trading at the money isn't ideal either for credit spreads--even now, you could pick up a bit more extrinsic (~.30 vs. .27 in your example), on a lower risk position (granted, you'd have left the intrinsic value on the table) that you'd have already picked up. Had this made the same move in the other direction and you'd gotten filled, you'd be looking at a pretty nasty loss (bigger than the unrealized gain) because you're heavily exposed to the price of the underlying--almost one-to-one on the downside.

Another one to be on the lookout for is different exchanges showing the best bid / offer. Unless you have specifically set your platform up to show a single exchange, it's ordinary for the best bid and offer to show on separate exchanges (on something as liquid as MU, you'd be less likely to see this). You'd have to look at level II quotes to see this.

 

[algotrader12]

What exactly was your spread ? Did you:

Buy
Sell Oct-6 39.50 put @ 0.99
Buy Oct-6 38.50 put @ 0.55

Or did you sell:

Buy 39.50
Sell 38.50

Those are not the same. The way I do it usually not to get confused, I setup a combo Buy larger primium and sell lesser, and then sell the combo. This way I do not get confused. Because if you bought the first one you need to bid -0.44 if you bid 0.44 that means you are ok paying 0.44 so they gave you whatever the spread was which looks like 0.10 I think this is what happened.

So I would suggest to always setup Buy larger /sell smaller and then buy or sell depending on what you want to do.

 

[codeine]

Thank you for the insightful feedback, gents. Clearly, I have some practical things to learn.

I don't normally trade around time of the open, I happened to enter this one early - what a mistake that was. Trade at liquid times when spread is narrowest.. duly noted. Mistake #1.

I almost always adhere to a percentage rule when utilizing credit spreads (i.e.: strikes have to be a certain percentage away from the money), but in this case I didn't, as I was over-confident of MU being bullish, and wanted to capture a wider credit. Mistake #2.

I think algotrader hit on exactly what happened. I believe I may have entered the Limit price incorrectly (non-negative, instead of negative). Mistake #3.

Other good notes on what the displayed (consolidated) spread may be, coming from different exchanges.. didn't realize that would affect fill, but the way the order is routed, I can understand that.

Thank you again for helping me clarify this.

 

[spindr0]

I wanted to trade in this manner:
Sell Oct-6 39.50 put @ 0.99
Buy Oct-6 38.50 put @ 0.55

I entered this order before the open this morning (which I now realize was a mistake), and it was filled thusly:

Bought Oct-6 38.50 put @ 5.00
Sold Oct-6 39.50 put @ 4.90

There are multiple problems here.

IB provides 3 ways to set up the order using "Combinations"/"Option Combos (SMART)". The 1st is MULTIPLE for creating several spreads for the same underlying. The 2nd is STRATEGY for creating a single order and the 3rd is PAIR OR LEG BY LEG.

You want to use STRATEGY when you create this order and the first leg must be the leg closer to the money (the Oct-6 $39.50 put). When the combo is created, there will be a bid and an ask.

Buying the spread means that you are buying the Oct-6 $39.50 put and selling the Oct-6 38.50 put.

Selling the spread means that you are selling the Oct-6 $39.50 put and buying the Oct-6 38.50 put.

Your first mistake is that you bought the spread instead of selling it. Until this is second nature to you, always left click on the box with the spread's description in order to open and display the details of the spread order and verify if you want to buy or sell the combo.

In certain other types of spreads, the bid and ask of the order will be negative numbers. I find that to be a headache and more prone to error so I'll use the 3rd choice of PAIR OR LEG BY LEG in order to reverse the legs so that the combo order quotes will be positive. For example, if the combo order is -.55 x -.45, reversing it will turn it into .45 x .55. Buying the first combo achieves the same result as sell the second combo. Details, details (g). Just get rid of the negative numbers and life will be easier.

Your second mistake is that you placed the order at 10 cents and therefore received the bad fill. If you enter the proper price (limit order) you get a proper fill.

It's a good idea to set up your orders before the market opens but it's not a good idea to place the orders unless you can figure out what the spread should be worth based on overnight change in the underlying's price plus anything additional if you're trying to get a better fill by splitting the bid. Stick to regular hours until you have this down pat. If any of this isn't clear, ask away.