If you are getting started on trading options on Interactive Brokers (ibkr) platform, this article will be useful to guide you through.
I use ibkr for my US shares investing and trading and I explained the reasons here:
Which Platform Do I Use For Options Trading?
ibkr has 3 separate interfaces that you can use and they are the mobile app (installed on your mobile device), the web app client portal (available on a website) and the desktop app, otherwise known as Trader Workstation (TWS). TWS is an application that you install on your computer and it is launched as a program on its own (just like your Microsoft office).
I use TWS the most and very minimally for the other 2.
For ibkr mobile app, I use it mainly for 2FA (2 Factor Authentication) purpose to login into my trading account over at TWS. I also use it to send instructions for top-up into my trading account. So, basically, you need to inform ibkr every time you need to top-up your trading account and thereafter, you will do a bank transfer to ibkr (they will provide you with an account number and it is the same account number for future transactions) with the amount that you have indicated.
The request for top-up can also be made via the Client Portal (see above screenshot), which you can login via this website:
I usually use the Client Portal to send messages (queries/ requests) to ibkr. I briefly used it to purchase some shares and to place an option trade but some options dates are not reflected at the Client Portal. According to the customer service officer that I have checked with, the Client Portal is for more for buying shares and less for trading options.
The most common ibkr app that I use is TWS.
Once logged and passed 2FA authentication, I will see this main page:
The yellow box (see above picture) shows all my current share portfolio, including my options contract, sorted according to type. POS indicates the number of respective assets that I am holding. POS 1 means I bought an option contract while -1 means I have sold an option contract. The pink box (again refer to above picture) is where I will input the price of premium that I am willing to pay or hoping to receive, based on my selection of whether to buy or sell.
Once I have submitted my order, I will be asked to confirm it. There will always be this message that pops up but I will usually click “Override and Transmit”. It is good to check your trade one more time before you click that button.
Once I have placed my trade, I will be directed to this order page (see picture below). It does not mean the order has been confirmed. I will usually play around with the price until it is assigned. When it is assigned, the status will be indicated as filled.
There is another page that I use often and that is the Options page:
The topmost part on the left (orange box) is where you can choose the stock/ company you wish to view and the expiration date for the contract you wish to place.
If you are looking to buy or sell CALL options, look at all the prices on the left side (indicated by the light green oval). If you are trading PUT options, look at all the prices on the right side (indicated by the light blue oval).
I usually look at the “bid” and “ask” prices. If you are a seller, you should look at the bid prices as that is how much people are willing to pay. If you are a buyer, you should look at the ask prices as that is how much people are asking for. I also look at the delta index and IV to plan my strategy for trading. The bid price will always be lower than the ask price for the obvious reason that you cannot buy something cheaper and then sell it off at a higher price.
When placing a trade, some traders like to indicate the mid-value of the bid and ask prices. I personally will start off with the extreme end first. If I am a seller, I will start off by placing an order with the highest premium that I can possibly receive. It usually does not get assigned right away. I will slowly reduce my price until it gets assigned. If I am a buyer, I will do the opposite, I will submit the lowest possible price and start working upwards until it is assigned.
For selling PUT options, I usually choose an expiration date that is between 30 to 40 days. That is because in an option contract, the last 30 days is when theta (time decay) drops the fastest (exponential drop). It means the contract will be losing its value rapidly starting from the first day of the last 30 days of the contract (see below graph). As a seller, you want to collect a maximum premium and then pay a minimum premium to close the contract. So, after you sell and collect the premium, you want the premium to drop quickly so that if you ever need to buy it back, it is a very low cost and you can earn a big profit.
This also means that if you sell PUT options 3 months out or 45 days, the premium difference between the 2 contracts will be very small. Thus, it makes no sense to sell at a longer duration, because you could have sold another contract while waiting for the long contract to expire and get a bigger premium altogether.
If you are still unsure on how to place a trade after reading this article, I would strongly encourage you to watch this 40-minute video by Adam Khoo as he explained how to place a trade with real simulation on his ibkr account. It is very beneficial if you need more details or guidance with a video. I have watched it a couple of times to grasp the full concept before trying it out on the app itself.
I hope this article helps in some ways and please share with your friends if you think they will benefit from it.
You can also use my referral link to sign up:
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