Using Spread Trade Platforms
Back before the days of online spread trade platforms, we used to have to call in our orders over the phone.
I remember my first big trade like this. I was a rookie at a boutique hedge fund in Atlanta. Since we were an institutional investor with millions under management, our orders went directly to the Chicago Board Options Exchange (CBOE).
After a split second ring, the line was connected and I immediately heard a thick Chicago voice yell “YOU GOT JOE!!” Joe had to yell because of the chaotic trading pit action in the background.
“Uh, I need to sell 100 calls… no PUTs… of IBM. That’s India, Boy, Maaaaaanitee” I stammered.
“These are the July… One hundred… no, the $105’s”
Joe cut me off. “Call me back when you get your s**t together kid!” he yelled. And the line went dead.
Thank goodness for today’s spread trade platforms! Now you can take your time setting up the perfect income trade, without ticking off a Chicago trading floor veteran!
Editor’s Note: This is part six of a multi-part series on credit option spreads. See also:
- Part I – Credit Option Spreads: Great Tools for Income Investors
- Part II – Bull Put Spreads: Income from Stocks Moving Higher
- Part III – Bear Call Spreads: Profit From Stocks Trading Lower
- Part IV – Spread Trade Permission: A Must for Income Investors
- Part V – When Should I Close Credit Spread Trades?
Make sure you check out the other parts so you know how to use this income-generating tool!
What Are Spread Trade Platforms?
Every spread trade includes two different option positions. For instance, a bull put spread involves selling one put contract and buying another. A bear call spread requires you to sell one call contract and buy another.
But you shouldn’t enter one side of the trade first, and then execute the second. It’s best to execute both trades simultaneously. This way, the market can’t move against you in the time between selling your first contract and buying the second.
To execute both sides of a spread trade simultaneously, you’ll need to use a spread trade platform.
Spread trade platforms are now offered by just about every online brokerage. If you have permission to enter spread trades, your brokerage should have a user-friendly platform for you to use.
Below is a screenshot from Interactive Brokers spread trade platform. (Interactive Brokers is one of a handful of brokerages I use for my own trading.)
Take a look at some specifics for how these platforms work…
Executing a Spread Trade In Your Account
The example above is for an IBM bull put spread. This example is NOT a recommendation. I picked this example just to show you how spread trade platforms work.
In the example above, I’m attempting to sell a September $160 put, and simultaneously buy a September $155 put. The $160 put is currently trading near $2.10, and the $150 put is trading near $0.96
So between the cash I receive from selling one put, and the cash I pay for buying the other put, I can expect to collect something close to $1.14 per share.
Notice that I’m entering this trade with a limit order. (You can see “LMT” in the bottom left corner.) The limit price I’m using is $1.20 – meaning the trade will only be exercised if I can net a $1.20 credit between the two transactions.
Spread trade platforms are simply tools that make it easy for you to set up spread trades.
Why You Should Use Spread Trade Platforms
There are three primary reasons you should use spread trade platforms when entering credit spread trades.
Ensure your trade is set up correctly. Most spread trade platforms automatically recognize common spread trade setups. So when you enter a spread trade, you can check to see if your setup fits the proper criteria.
This helps you avoid trade errors when setting up a new credit spread trade
Avoid risk of price shifts. If you enter both sides of a spread trade separately, you’re taking a big risk. That’s because you could sell your first put at an attractive price, and then the market could move. You might then have to pay a premium for the contract you’re buying. This would leave you with less profit
Using spread trade platforms ensures that you will only enter a transaction if both sides are executed.
Receive the most income. When you sell one contract and buy another, you have two opportunities to receive an unattractive price. But by using a limit order with a spread trade platform, you can designate how much income you want to receive. You’ll either get “filled” for the agreed upon amount of income or your order will not be filled.
Where To Next?
This article wraps up my series on credit spread trades. But I have a question for you…
Would it be helpful for me to post an instructional video covering some of this information? Maybe I could show some screenshots of me executing a spread trade. This way you could see how I use these income opportunities in my own account.
If this is something you would like to see, I would love to know! You could either leave a comment on this post, or send me an email (Zach@ZachScheidt.com).
If you would like to see an instructional video, I have one more request…
Do you have experience creating or editing a video (including audio, screen capture, and splicing in video segments)? While I’ve worked hard to become an expert at income investing, I have very little experience in the audio visual area.
I could use some tips on which programs to use. Ironically, this is probably something my 13-year-old daughter could teach me. But audio visual production is not in my skill set (yet) – haha!
Anyway, I’d love to hear what you think about this series. Whether good, bad, or indifferent; please leave your comments below.
Here’s to growing your income!