What limit price should I enter for a credit spread?

[nwoptions]

Hi guys,

Let's say I'm doing a bull put spread for AMD. The max return is $18 according the Interactive Brokers. Should the limit price I enter be -0.18?

When I enter this number I get a message saying: "The limit price exceeds the market price by 11.73%; the current limit is 3%."

What should I do?

Pic included. Thanks.

 

[guru]

Hi guys,

Let's say I'm doing a bull put spread for AMD. The max return is $18 according the Interactive Brokers. Should the limit price I enter be -0.18?

When I enter this number I get a message saying: "The limit price exceeds the market price by 11.73%; the current limit is 3%."

What should I do?

Pic included. Thanks.

You should enter a limit price that is somewhere between bid and ask, which IB should be showing. It may be max return, but max return is usually based on a price unfavorable to you, so you may want to try to get a better price. In your example I think the bid is -$0.24 and ask is -$0.18, so you may be able to get -$0.21.
This is also the reason you’re seeing that screen/message. But that message isn’t an error, just informing you that you’re trying to overpay for those options.

 

[HobbyTrading]

When I enter this number I get a message saying: "The limit price exceeds the market price by 11.73%; the current limit is 3%."

TWS does not give you any trading advice. However, there are some "safety nets" to avoid you making mistakes by typing in wrong numbers. The screen you show is one of those warnings. But, as you can see in the window, you can set the warning level as tight or wide as you prefer.

 

[nwoptions]

You should enter a limit price that is somewhere between bid and ask, which IB should be showing. It may be max return, but max return is usually based on a price unfavorable to you, so you may want to try to get a better price. In your example I think the bid is -$0.24 and ask is -$0.18, so you may be able to get -$0.21.
This is also the reason you’re seeing that screen/message. But that message isn’t an error, just informing you that you’re trying to overpay for those options.

Thanks guru for all your help.

 

[nwoptions]

Sorry I forgot to ask:

When you say "You should enter a limit price that is somewhere between bid and ask," do you mean clicking on the 'mid' button? I don't see that feature inside OptionTrader. I only see the bid/ask for each leg of the vertical spread but there's no ability to choose mid for the vertical spread. I've seen this in other areas of IB, just not in OptionTrader.

Do you recommend that I use OptionTrader?

Thanks again.

 

[guru]

Sorry I forgot to ask:

When you say "You should enter a limit price that is somewhere between bid and ask," do you mean clicking on the 'mid' button? I don't see that feature inside OptionTrader. I only see the bid/ask for each leg of the vertical spread but there's no ability to choose mid for the vertical spread. I've seen this in other areas of IB, just not in OptionTrader.

Do you recommend that I use OptionTrader?

Thanks again.

Personally I don’t use OptionTrader, only the Strategy Builder below the options chain. The mid button doesn’t always work, like when there are no bids or asks on one of the legs, or at night, and maybe due to other issues. I usually just calculate the mid price based on bid & ask. And decide if I’m willing to accept a bit worse price or wait for better price. Quite often I place the order with limit at the calculated mid price first, then adjust the limit once the order is live, depending how fast I’m trying to get it filled. Sometimes I review the recent option price on the chart, to make sure I’m not overpaying much beyond what it was recently traded at.