 Hey everyone Lee Lowell here smartoptioncell.com. Hey listen I've getting lots of questions about how to create how to trade option credit spreads within interactive brokers their their trader workstation their platform. Now there's many different ways to create a spread an option spread so what I'm going to do right now is show you in the paper trading account with IB how to create an option credit spread and what the what the mechanics look like and and how to figure out the price that you want to sell the spread for. Now these are these are option credit spreads that we will look at put option credit spreads so if you're if you're interested in learning how to do this with interactive brokers I will show you the three different methods and if you use another platform like eTrade or or TD Ameritrade maybe it works the same with those I don't trade with TD Ameritrade or eTrade so I can't give an example but this is how we do it with interactive brokers so let me show you how we do it let me make myself a little smaller here so when you open up the trader workstation with interactive brokers you have the opportunity to look at three different formats of this this desktop screen right here now if you're using the the app on your phone it's a little different I don't use the app in the in my office all the time so I only use the desktop version so this is the desktop version of trader workstation and you can have three different I guess platforms you want to call them within the trader workstation you have this is what's called the classic if you see my mouth down here at the bottom this is the classic TWS trader workstation this is the oldest version that they have it's the one that they originally started with it's the one that I use most often because I've been with interactive brokers for you know 20-some odd years when they first came around so I've always used this classic version and it's what they started with and I'm just so used it but they have the mosaic they have the mosaic version and the options trading version as well so I'm going to go through all three and show you how to create an option credit spread so first off when you when you get to the the classic version this is the like the real estate you'll see this is what it opens up to and you have to populate and fill in all the information you want but this is this is the way I do it this is the way I like to do it and a lot of people will tell me when they're creating option credit spreads within interactive brokers the credit number the credit price comes up with a negative sign in front of the credit amount which is very strange to me because when you use the the TWS version like this it doesn't come up that way so let me show you what I mean let's take a look at Apple and decide that we want to sell a put option credit spread on Apple so I type in the symbol for Apple this will give me the the first line I like to have is the actual stock itself so here's the stock price bitten ass now this is the this is the paper trading account so I think these prices are are possibly delayed 15 minutes now when when you want to create another line another quote line for the actual spread itself you type in the symbol APL for Apple you hit enter so it gives you this menu here and under the Apple ink this is all the choices you can have we go down to combinations and we hit option combos smart directed that's going to give you the breath the best prices to the best option exchange that's available at the time so we click on option combos smart and it'll bring up another window that allows you to choose the type of spread or option strategy you want to use now in this case it's a vertical spread here you have these tabs at the top you click on the strategy tab and then on this little drop down it gives you all these different choices of types of option strategies a bull put credit spread is a type of vertical spread so we choose the vertical spread option it pre-filled pre-filled in here because this is what I always use and we're going to sell the combo we're going to sell the spread so we click this down arrow and we click sell here now I want to look at let's say the the May 21st 2021 you can do whatever ratio you want we do one to one and we're going to select puts because we're selling put spreads and we're going to look at the let's say the apples at 120 something dollars we're going to look at the 100 put to sell and we're going to buy the 95 put $5 wide spread and now you have this filled in you click on add and what it'll do is it'll it will you bring up this other window it shows you if you're going to buy now now now interactive brokers calls it a bear spread now in the actual trading lingo a bull spread a bull put option credit spread when you want to sell the put spread it's called a bull put spread when you when you buy the spread it's called a bear spread so it's just a difference in the lingo it tells you if you're going to buy the spread you're going to buy the higher strike and sell the lower strike that's not what we're doing we're selling this spread and we're going to sell the higher strike which is the hundred put and we're going to buy the lower strike so let's just close this window close this window now what we have here is the what I be does is it gives you each leg the 95 put in the 100 put and it gives you the bid ass on each one but it also populates the spread price right here the spread line it fills it in for you so the spread itself is actually a 53 cent bid at 58 cent offer now one of the ways that you can tell the fair value of a spread is somewhere in the middle so this spread is probably worth 55 or so cents per spread but what you can also do is you can subtract the bids from each other subtract the offers from each other and you can see what the value is so this is about 56 cents right here subtract each one and this is 57 cents right here so the spread is probably somewhere between 56 57 cents now you can see the spread line is moving 53 cent bid at 60 offer now and it's moving because the price of Apple stock is moving so when the stock moves obviously the option prices move and that'll affect the spread price as well so now if we I want to sell this spread all I have to do is invoke a selling spread by clicking on the bid price you can click on the ask price that'll invoke a buy ticket but we want to sell the spread so we click on the bid price it'll invoke a spread ticket now what this does is that it pre-populates this this order ticket for you so it's telling you you've got the Apple May 195 it really should be bull put spread but it doesn't really matter we're gonna sell it make sure you have this the dot in the sell here and we're gonna sell one spread and we're gonna use a limit price of 56 cents credit okay we're when you sell a spread or you sell an option you're getting a credit someone's buying it from you so you're selling it that's a credit into your account now we always click the preview button to see what's going to happen before we actually place the trade don't worry about this yellow information here it really doesn't mean anything so what we're about to do is we're selling one combo we're selling the higher strike 100 put we're buying the lower strike 95 put $5 wide and we're gonna get a credit of 56 cents you see the C the green C means it's a credit you're getting money into your account now what people will tell me and I'll show you in the other versions that a lot of times this 56 amount will have a negative sign in front of it which I'm not sure why IB does that you're still getting a credit it just they happen to put a negative sign in front of it when I use the classic version which we're using right now it doesn't do that so down here it tells you you know you're gonna sell it for 56 cent credit that's 56 actual dollars for each spread that you sold commissions here and here's your net price you'll get $53.76 roughly and on the right hand side it tells you your your account balance before the trade and your account balance after the trade since I'm going to be getting roughly $53 my account balance will go up by $53 okay this this amount here is about $53 more than this amount this is a paper trading account I wish I had a million bucks but this is just you know fake money and the margin requirement always is the the distance between the strike prices this is a $5 wide spread so that's $500 for each one single spread so there's your margin requirement $500 okay and that's the maximum risk in the trade as well you're gonna collect $56 to risk $500 that's actually $444 right $444 plus $56 that's that's $500 but anyway you can't lose more than $500 a little less than that if you subtract out your credit so we're not gonna we're not gonna submit this trade hit close so that's how you do it when you want to invoke a spread trade using the classic TWS version now you could also use the mosaic I'm gonna show you how to do a spread and mosaic this is how this is what a lot of people use because it's a more advanced it's more I'd say more bells and whistles with with the with the mosaic version here so what you can do is you have you can have these windows here different windows you have a chart you can have quotes news whatever but in order to get some options activity or some option chains here you can also you click up here where it says new window click the down arrow and you go to the let me move myself over here you go down to where it says options tools and you can click on any one of these we're gonna first click an option chain it's gonna bring up a new window okay here's the new window right here and we have Apple populated in here app this is the Apple option chain it's already in for the May that's what we just looked at so you can also create the option spread from within the chain itself but what you do is down here you have the option chain up here and then you have this other window down here which is the strategy builder make sure you have the strategy toggle button on so it'll bring up the other window here so what we're going to do is within the chain itself when we click on to create the spread we click on the bid price of the 100 put because that's the one we're selling so we click on the bid price and it'll bring it up down here okay now we click on the offer price of the 95 put because that's the one we're going to buy in the spread click on the offer price so now it's populated a spread down here a spread order for yourself it gives you a little graph over here and I think you can also use the strategies button here to create a vertical spread I had I haven't used that yet I just click on the bid and ask like I just showed you so now you have this this window here and it's you're selling right here at the top line you're selling the 100 put and the second line you're buying the 95 put as a spread down here is where you actually enter the number of contracts and the price so it's got quantity here you click on the limit price here and we're going to sell this for see now it's got the negative number we're going to try for 56 cents somewhere in between the current bid as price now we've got a limit price we're selling one at 56 cent credit for day order if you want to keep a good till cancelled you can use these this drop down here so when we click on submit order and it shows the margin impact is $500 just like the other screen we worked in in the classic version it's going to have the same kind of ticket here you've got the the bull put spread now here it says bull put so IB is giving you different different lingo in different versions here you're selling the 100 put you're buying the 95 put remember green see your credit but this one says a negative 56 cents okay so for whatever reason it's showing a negative 56 cents you're still going to get 56 bucks but I don't know why IB shows it with a negative number it's still going to do the same thing you're still going to sell the 100 put and by the 95 put and here you can look over here although it says a negative 56 dollars over here it shows you how much you'll get $53 and your account value will go up by $53 same initial margin so it's the same thing it's just a different way to create the spread now let's go over to the options trading tab right here the options trading tab it'll it has a different setup okay you can create different windows each one of these windows is separate from the other and you can you can populate them you can move them around whatever and the top part of the screen here is the option chain for for apple let's click on the May options we're going to do the same thing we have the 100 puts and 95 puts over here I think what we can do is let's let's widen this out open this up a little bit so we can can see what we're doing now here's the calls on the left puts on the right but I want to show you down here is the strategy part of the builder now what you can do is you can slide up the chain so you can see more of the real estate down here okay so we're going to do the same thing you have the strategy builder on we're going to sell the 100 puts so we're going to invoke a sell order by clicking on the bid price we're going to click on the offer price of the 95 puts that invokes a buy a buy order so once again you have the the the the the trade set up right here you're selling the 100 put you're buying the 95 put and you want to down here is where you put in your your your parameters so you got one quantity again click on the limit price button right here and we're going to put in the 56 credit now once again it's a negative number the classic version down here shows the credit as a positive number these two other tabs mosaic an options trader shows the the credit with a negative number for whatever reason why I don't know why IB does it click on submit over here and you'll get the same window okay you're selling the 100 put buying the 95 put a credit green seed means a credit you're getting money of negative 56 shows a negative sign whatever for whatever reason and it says if you actually hover your mouse over the sea it says limit price of credit of 56 cents so this is showing it as a positive anyway over here you can still see it's a positive $53 your margin requirement and total risk is $500 so it's the same thing you're just using different windows to create the spread okay so we're going to cancel this that's how you that's how you create a spread when you when you sell a spread that's the first part of the equation right you're selling the spread and then hopefully the trade moves in your favor then you can buy the spread back you just do it in reverse when you're ready to buy the spread back let's say we did get filled at 56 cent credit then next week the spreads worth 25 cents let's say well you want to lock in your gain you want to lock in your 31 cent gain so you want to buy the whole spread back and how do you do that well let's clear all these legs so it's right here it says clear all legs so when you're ready to buy that the spread back whenever that may be it could be tomorrow next week an hour later you can always get in and out of option trades whenever you want so to to invoke the the buyback you know remember you sold the spread first now you're gonna buy the whole spread back as you're closing transaction that means you're going to buy the 100 put now and sell the 95 put you're just reversing what you've done before so what you we are going to invoke the buyback by we're buying placing the clicking on the offer price for the 100 put this time and now we're gonna click on the bid price of the 95 put so now we've created a spread where we're buying back the 100 put we're buying back the 100 put and we're selling the 95 put if this trade gets executed it will completely close out the whole trade hopefully for a profit so down here we will limit price let's just say we want to buy it back for 25 cents okay so it's a debit so whenever you're buying something it's a debit before when we sold it it's a credit so let's hit submit order so now we are now it's called a bare put since we're buying the put spread you're buying the 100 put and selling the 95 put for a debit a red D means debit 25 cents so this is this has no negative number so obviously IB is showing debits with a positive and credits with a negative so it'll be a 25 cent debit but since you sold it for 56 and you're buying it back for 25 that's still going to be a profit of 31 cents if this trade gets filled so it'll be let's see so I'm not sure why it says a negative 53 dollars in here shouldn't be but for whatever reason that's maybe that's because that's what the current price of the spread is but anyway as long as you know what you're doing you're buying the 100 put and selling 95 for 25 cent debit that this is a good will be an order that'll sit there it's a limit order since it's worth 53 cents now you can't get filled you can't buy it for 25 cents when it's currently at 53 cents so you have to wait for the spread to decline in price so we'll cancel this now let's go back to the the classic version here so if I wanted to buy this spread if I want let's just say we sold it for 56 and I want to try to buy it back for for 25 cents here's the spread line okay here's the spread it's 50 cent bid at 58 I'm going to click on the offer price and it'll bring up the next window so now I'm going to buy this spread okay we're going to buy it and we're going to pay 25 cents so I have to move down here 25 cents when I click on preview it'll show you what's going to happen so once again red debit for 25 cents buying the combo we're buying the 100 put now and selling the 95 this is only done as the secondary the buying to close the transaction and once again it has a negative 52 here that's what the spread is worth currently we want to try to buy it for 25 cents well so we would have to wait for this trade to go through so we close this out so there you go that's that's really the way to create spreads rates spreads in interactive brokers now you can do call spreads you can buy call spreads sell call spreads by put spread sell put spreads it's all the same mechanics okay we can create if we wanted to we can create a call spread here I showed you how to pull up the legs each one of these is called a leg and here's the full spread price and then you can go use the options trader options trading tab or the mosaic it'll bring up the same things it'll it'll have the windows here and you can use the strategy builder to create any spread that you want you can also use the the strategies drop down here let's see what happens if I click on straddle just to see all right so it'll it'll ask you to so if you're gonna buy a straddle that means you're buying a put and a call same strike price same month so let's just say wanted to buy the the 100 put and I want to buy the 100 call so there you go it actually had we don't want this leg in here oh yeah actually I gave the wrong one so we got the 105 call and I want to buy the 105 put so there you go it's got the straddle so you could use this drop down to you know it doesn't matter you can use the drop down or you can just click on bids and offers and it'll create the spread for you so there you go there is your there's your lesson on how to use interactive broker street of inversions you got the mosaic you got the options trader and the old style classic TWS which is what I like to use someone had told me once before you're that I like to use the MS-DOS version of computers way back old style so anyway there you go I hope this is useful for you you know in the in the video in this YouTube video give me a thumbs up but this is helpful leave me a comment and that's it for for this lesson all right take care everyone