Trading option strategies on IB TWS

[traderwald]

Hi guys,

I am looking to place on the paper trading account some vertical spreads on IB TWS and the order form is something I want to understand better.

- Why does it give the total average price of the spread rather than the individual prices of the long call and the short call in the order form ? i.e. I can only put an order for the average price. there is no option to individually put the limit price on each of the options.

1. Is there a way to do it on IB TWS ? Are all other platforms similar for combination orders ?

2. How does the trade occur on the exchange ? Will it only get filled when the Bid (short)+ ask (long) average is the limit price I put in the order ? Because it seems bit more complicated to get filled in this way ? And also a bit confusing as to the exact price at which each order (long, short ) will be filled at since that is how I calculate the profit before going into the trade.

3. When closing also - does it close only as combination ?

4. Can we do a Vertical spread without using strategy builder ? Like place individual orders ? (I would get the long filled first before placing the short order)

5. Also, there is a trade type called REL+LMT which is described as once the first order trades the second is submitted as limit. What is the first order traded as - is it limit or Mkt ? And what does REL mean ?

Thank you

 

[tommcginnis]

You need to realize that TWS is a raw platform with 2-3-4 different ways to do any single task. The best way for any given user will differ from the best way for any other trader, as those traders' intercourse with the markets differ. Thus, different traders' TWS set-ups will differ *hugely* one to another to another -- to the point of barely being recognizable as TWS.

From your posts, I surmise that you are quite new to trading and to TWS. PLEASE SLOW DOWN. You have two *major* tasks in front of you -- the markets, and the tools. Once you learn about those two, you can learn the interface between them: "trading."

You will not learn what you wish to know from reading ET. You will get it from hours and hours and hours, of IB webinars on TWS and on trading (I recommend Russell Rhodes as head&shoulders above the rest); and then spending hours and *more* hours watching the markets, trying paper trades, and generally keep your capital far from market exposure.

Again: There are MANY ways to do any given task in TWS, and you will want to learn them all, to learn your preferred method, and to learn your back-ups.

 

[guru]

Re: 1
It’s the same with all tools and brokers because when buying a spread or any option combination, you are trading that whole combination, not individual options. Another seller (or buyer), or usually a market maker, will evaluate the price of the combo that you’re offering to pay and will also decide based on the price of the whole combo whether to sell it to you (or buy) at that price. And it’s already difficult to get single option orders filled at decent prices at specific time, so imagine if you’d also specify additional conditions about each leg (option) in your combo to be priced at your prices at exactly the same time - that’s like asking for something impossible to happen.
And market makers look at price of orders in the market (not individual legs), and that’s also hard enough to get filled, while you’d never find anyone who’d even bother to sell you a combo with each leg priced exactly the way you’d want. And even the whole point of trading option combos is exactly to simplify things and specify single price for the combo, not trade each leg separately and imagine that it’s a spread. When I want to trade a spread then I don’t want to worry or care about the price of each leg, in addition to the price of the spread as a whole. And I calculate my P&L based on the spread, not based on each leg - otherwise I’d trade individual options and not spreads or combos.

Re: 2
Brokers simply send orders to exchanges and that’s how orders are priced and traded at exchanges - with a single price for a combo, while it’s the exchange’s job to either find another buyer/seller for the whole combo or find multiple buyers/sellers that will match your order at your price, regardlsss of the price of individual legs.
Though initially the exchange will post your order as a whole (combo) and do a quick 100 millisecond auction to see if any market makers are interested. If the price is attractive (to MMs) then one of their computers will fill your order, unless there is a matching order already submitted by someone else and you’ll trade with another trader - but that’s rare. Otherwise your order will stay in the system until the market moves in the direction when your order becomes attractive and either picked by a market maker, or matched against another order that may get submitted. Most of the time your order will be picked by market makers because there are too many possible leg combinations to find matching orders directly between individual traders.
Re: “ since that is how I calculate the profit before going into the trade.” - this absolutely doesn’t make sense and you’re the first in the entire world, I’m serious. Once you start trading combos you’ll realize why. (less accounting hassle while result will be the same, while many times you’ll see simply invalid/wrong prices on each leg even though the whole combo will be priced reasonably - for various reasons).

Re: 3. Yes.

Re:4. Yes, but they won’t appear as spreads, so you’ll just need to keep trading them as individual options and imagine or track them as spreads separately. Some people use this as a strategy to leg-in and leg-out into and out of spreads, but it can get messy.

Re: 5 This is too advanced even for me to use and I’d be afraid to touch it, so you’re trying to chew too much before even learning how to trade spreads like everyone else. But generally I think this order type means that one leg will get filled when the average price of both legs appears to be within your limit, but without guaranteeing that the 2nd leg will be filled, only a limit price would be set on the 2nd order for the 2nd leg after 1st one gets filled. This may be a bit similar to your goal of buying each leg separately, but you still can’t specify the price of individual legs.
“REL” means relative and may be used generically in different contexts for different orders/options/stocks, but here it seems to indicate the price of both legs being relative in a way to obtain average price between the legs.

 

[tommcginnis]

And it’s already difficult to get single option orders filled at decent prices at specific time, so imagine if you’d also specify additional conditions about each leg (option) in your combo to be priced at your prices at exactly the same time - that’s like asking for something impossible to happen.

Worth repeating.

Re: “ since that is how I calculate the profit before going into the trade.” - this absolutely doesn’t make sense and you’re the first in the entire world, I’m serious. Once you start trading combos you’ll realize why. (less accounting hassle while result will be the same, while many times you’ll see simply invalid/wrong prices on each leg even though the whole combo will be priced reasonably - for various reasons).

Yep.

Re: 3. Yes.

Yes and no. The market will trade what you proffer. If you submit the two legs as a (fixed) combo, it will trade (to you) that way. Watch your trade history(s), and you will see what guru described above: sometimes one leg (or part of one leg) will trade in through one exchange, while the other(s) will trade in wholly different locales. (And with wholly different exchange fees -- the purpose of IB's SmartRouting.) But if you choose to leg out of any of your option positions, IB and the market are agnostic.

Re:4. Yes, but they won’t appear as spreads, so you’ll just need to keep trading them as individual options and imagine or track them as spreads separately. Some people use this as a strategy to leg-in and leg-out into and out of spreads, but it can get messy.

No -- there are various configuration switches to specify how TWS tracks combos that the user has built -- some of which track as combos, and some that don't. One *primary* determinant is how the spread was built -- I have never used Strategy Builder for much -- it just didn't fit my trading patterns. (I did the drag&drop -- you can build a raft of iron condors while having all strikes, positions, and stats right in front of you.)

Re: 5 This is too advanced even for me to use and I’d be afraid to touch it, so you’re trying to chew too much before even learning how to trade spreads like everyone else.

 

[guru]

Worth repeating.

Re: 4...
No -- there are various configuration switches to specify how TWS tracks combos that the user has built -- some of which track as combos, and some that don't. One *primary* determinant is how the spread was built -- I have never used Strategy Builder for much -- it just didn't fit my trading patterns. (I did the drag&drop -- you can build a raft of iron condors while having all strikes, positions, and stats right in front of you.)

Do you know if there is a way to track individual options as a combo, or basically combine individual legs into a combo - in IB TWS?
I haven't found such way but sometimes would love to combine different options into combos, as it gets too messy with lots of options.
Actually one issue with TWS is that it splits my combos into individual options when I trade combos that cross the legs of my previous combos - basically buying back one of my previous legs and selling another one, or vice-versa (unintentionally, for example buying a lower put spread after a previous one got filled with one leg crossing).

 

[tommcginnis]

https://elitetrader.com/et/threads/ib-tws-layout-nightmare.307561/page-9#post-4450754 ??