Download and set up the Interactive Brokers TWS platform
- The Interactive Brokers platform is best used on the PC – click here to download IB TWS. There is also a mobile version that you can get from your respective mobile app store – just search Interactive Brokers and it should come up.
- Click here to download the layout style you will be using. Unzip the file to your desktop or somewhere easy to find.
- Log into your IB TWS, go to File -> Layout/Settings Recovery. Choose Custom and click ok. Find the default-layout.xml you unzipped previously and load it into your TWS.
How to use the TWS platform
Once you have the custom layout style loaded, you should be presented with a screen similar to the one below:
There are a number of important columns on this screen.
Monitor / Portfolio section
Net Liq – Total value of your portfolio if all positions were closed today.
Maintenance – the amount of money used as margin and held as collateral to hold the open options positions.
Excess Liq – How much liquidity is available to open additional positions.
DLY P&L, UNREALIZED P&L – These columns tell you your profit and loss. The profit and loss are calculated off the MARK column and can be relatively inaccurate.
FIN INSTRUMENT – this is the combo. As we trade spreads, each leg of a spread (e.g. a bought and sold leg in a bull put spread) is combined into one line to give a single profit and loss.
You can press the + button to the left to open the combo and see what each leg is. This is generally not required as the combined numbers are what is important for a spread.
In fact, looking at individual legs can be very confusing – it is best not to do that.
DAYS – Days Till Expiry (DTE). This is how many days until the contract expires.
DLT DLLRS – One of the most important columns. This tells you your dollar exposure and leverage. In this example, the November 19 expiries have total DD of -10,774. The December 17 series has +6,688, for a net DD of -4,086.
This means that this portfolio is short 8% (-4,086 / 51,000). Theoretically, if all things remain equal and the market moves up 1%, the portfolio should fall 0.08%.
The delta dollars can often be wrong, as it uses the theoretical greek delta to calculate it.
POSITION – positions size of the combo.
AVG PX – The average price of the combo, this is your entry price.
MARK – The theoretical price of the combo. The theoretical price is often wrong, which means the P&L numbers are often wrong and can be off by up to 25%, or more.
It is especially wrong just before and during market open at 10:00 am and after close at 4:10 pm, so take this metric and the P&L with a grain of salt.
This is just the nature of options markets as the market is subject to supply and demand, meaning the price of an option is rarely the same as its theoretical value.
Theta (top right corner) – this is the rate at which the portfolio decays. In this example, the theta is 46.8, which means it is decaying at around $46.80 per day.
There are approximately 250 trading days in a year and if everything stays constant, the decay rate in profit is $11,700 (250 x 46.80), or 23% return (11,700/51,000).
Vega (top right corner) – the sensitivity of the portfolio to a change in volatility. This portfolio has a vega of -119.70 so if everything stays constant, the portfolio should lose $119.70 if volatility goes up 1%.
The bottom right graph (XVI) is the volatility graph.
What causes an option to change in value
Options are very heavily based on probabilities and theoretical values. This means that there are a lot of assumptions.
What you may have found throughout this page is that I have mentioned “if everything stays constant” quite often, but as you can imagine, this is never the case.
The theoretical changes can only give us a ballpark of how the portfolio will react to the market based on one variable at a time.
The factors below have the strongest effects on how your portfolio will behave, in order:
- Delta Dollars – this is your directional exposure, the higher it is compared to your Net Liq value (your portfolio value), the more leverage the account currently has.
- Vega – since we are generally selling options, the portfolio is almost always negative vega. This means that the portfolio will benefit more from a rising market than a falling one as volatility generally goes up when markets go down.
- Theta – how quickly your portfolio decays on a daily basis. The higher the decay, the more potential profit.
The goal of this options income strategy is to use long and short Delta Dollar positions to increase or reduce directional risk at the appropriate times, whilst simultaneously maximising Theta decay to generate profit.