Option Liquidity Tool
Instructions
IBUSOPT, an order destination for US equity and index options, is offers the opportunity for clients to interact with
The Option Liquidity Tool leverages our IBUSOPT destination by automating the bidding and offering of selected options sent there, while staying within client-defined risk limits.
Notes
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Currently, the Option Liquidity Tool is available to users who have the US Options Bundle with Level 3 or Level 4 options trading permissions.
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This tool is available to retail and Advisor Client accounts.
To access the Option Liquidity Tool:
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From Classic
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From Mosaic: Use the New Window drop down and from the Option Tools section select Advanced Option Tools and then select Option Liquidity Tool.
To use the Option Liquidity Tool
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Select or search for an asset in the Financial Instrument field.
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Configure the order using available fields:
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Start with: Choose from:
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Buy : Algo sends out BUY orders first, for the full Order Size. As partial or complete fills come in, opposite side orders are sent immediately for the size of the fill. This action occurs for each individual option selected, and there is no further relation between option contracts. The algo stops after a full round is complete, which means when all initially selected options fill for the initial Order Size on Buy side and then additional opposite side orders fill.
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Sell: Algo sends out SELL orders first, for the full Order Size. As partial or complete fills come in, opposite side orders are sent immediately for the size of the fill. This action occurs for each individual option selected, and there is no further relation between option contracts. The algo stops after a full round is complete, which means when all initially selected options fill for the initial Order Size on Sell side and then additional opposite side orders fill.
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Buy and Sell: BUY and SELL orders for the full size go out at the same time for all selected options. Action taken on partial or complete fills is determined by parameters in the second column of Configure Order fields, i.e. Reduce other orders' sizes on fills. The algo continues to work (doesn't stop after a single round like single-mode BUY or SELL). Instead it keeps bidding/offering indefinitely until the account runs out of funds, or until user-defined risk limits (set in the Limit Exposure section) are hit. This represents "market making" mode.
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Order Type: The Option Liquidity Tool supports Relative, Pegged to Midpoint, and Pegged to Best orders. These are considered liquidity-adding order types and reflect the order types supported for IBUSOPT destination.
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Order parameters for each order type are displayed when the order type is selected. Find out more about supported types:
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- Order size:Determines each individual option order's size. This setting may effect other fields and their behavior.
- Reduce other orders' sizes on fills: When checked, orders of the same right and side are bundled as an OCA (one cancels another) order. If any member of the OCA group fills (partial or complete) the remaining orders are reduced by the size of the fill.
- Always bid and offer for the full size: Only available in "non-group" mode. If checked, the algo will always bid and offer for the full size of the original order and will compensate for partial fills by immediately issuing orders of the same partial sizes.
- Total group size (active when Reduce other orders' sizes on fills is checked): This order size will be shared among orders of all selected strikes on a given side. Orders created on the same side will belong to the same OCA group. On fills, the sizes of the remain orders will be reduced, with overfill protection. Note that the Total Group Size cannot be smaller than the Order Size.
- Trade Options: Check to allow the algorithm to bid and offer on the options selected below in the Option Chains. This is optional; you can choose to only trade the underlying.
- Trade the Underlying: Check to have the algo bid and offer on the underlying stock or ETF. These orders are sent as Relative with a zero offset, and are routed to
- Allow orders to be filled outside RTH: Allows stocks and ETFs to trade outside regular hours on IBEOS. Some options can be filled after hours which could keep the algo running.
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Limit Exposure (optional) Define specific exposure limits. Once you've set your limits, see #4 below to specify the action you want the algo to take when the limit(s) is reached. Note that all limit thresholds are on NET measured values.
- Maximum Delta/Delta Dollars Strategy: The maximum Delta or Delta Dollars value allowed before limitations are applied. This is for the active algo on this tab only.
- Maximum Global Delta Dollars: The sum of net strategy Delta Dollars for all active strategies on all tabs.
- Maximum Correlated Delta Dollars: The sum of all correlated net strategy Delta Dollars for all active strategies on all tabs. This exposure limit applies a calculated correlation coefficient to each pair of active algos that expresses the likelihood that multiple underlying contracts will move together, based on historical performance.
To better understand the above delta dollars limitations, let's consider this example:
Suppose we have three active algos for symbols A, B, and C running in the Option Liquidity Tool. All three algo portfolios have a Net Strategy Delta Dollars value that's calculated out of the positions that have been accumulated up to that point. It measures the expected profits (expressed in dollars)if the underlying price moves one unit. So if the delta exposure of a portfolio is $200 million and the underlying security moves up 1%, the portfolio should increase in value by approximately $200 million x 1% or $2 million. This goes the other way too. To limit the amount of potential risk we take on we enter a value in the first limit exposure field, Maximum Delta/Delta Dollars Strategy.
In addition to measuring and limiting this expectation for a single strategy/symbol, we also want to control the risk for all the algos running together, to avoid a loss above a certain level even if the individual limits would not warrant it. One way to do this is to sum up all of the net strategy delta dollars for all active algos. We call this the Global Delta. When we set a limit for it using the Maximum Global Delta Dollarsfield, if the limit is exceeded all of the algos will stop accumulating positions in the direction that would lead further beyond the limit. Since the order in which we add up the individual algo values doesn't matter, the limit will be the same for all the symbols. We cannot have different global limits for different algos. The issue with the global limit is that it's just a simple threshold.
A slightly more sophisticated way to limit single and overall exposure across all algos is to consider the probability that the individual algos running in the set are going to move together. For example if some news comes out during trading that affects a certain sector, all companies within that sector are likely to benefit or suffer from that news. We call this industry-wide delta risk the Correlated Delta.
Let's assume the following correlation coefficients, which show the direction and extent of one's movement to the other, have been established:
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Correlation between A & B (CorrAB) = 0.95. This means that A and B have a strong correlation and will likely move together to almost the same degree
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Correlation between A & C (CorrAC) = 0.5. A and C have about a 50% correlation and are half as likely to move together.
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Correlation between B & C (CorrBC) = -0.1. Finally, B & C are barely connected and if one moves in one direction, the other is likely to move in the opposite direction.
These values go both ways; CorrBC in its meaning (and value) is equal to CorrCB.
We can then calculate this correlated value for each individual symbol/algo by summing up their strategy delta values (STRDEL) and multiplying by the likelihood of them moving together (by their correlation coefficient):
Correlation Delta (A) = 1 * STRDEL(A) + CorrAB * STRDEL(B) + CorrAC * STRDEL(C)
Correlation Delta (B) = 1 * STRDEL(B) + CorrAB * STRDEL(A) + CorrBC * STRDEL(C)
Correlation Delta (C) = 1 * STRDEL(C) + CorrAC * STRDEL(A) + CorrBC * STRDEL(B)
Assuming STRDEL values coming from the various positions in A,B,and C each amount to 10,000 USD delta dollars at some point in time, this means:
Correlation Delta (A) = 1 * 10,000 + 0.95 * 10,000 + 0.5 * 10,000 -> 24,500
Correlation Delta (B) = 1 * 10,000 + 0.95 * 10,000 + -0.1 * 10,000 -> 18,500
Correlation Delta (C) = 1 * 10,000 + 0.5 * 10,000 + -0.1 * 10,000 -> 14,000
The global delta measurement in this example would be 30,000 for all three.
Although the Correlated Delta is calculated similarly to the Global Delta in that both sum up values from all other active algos, the results differ as the Global Delta Dollars strategy value is the same for each algo, and the Correlated Delta Dollars value is going to be different for each symbol.
The limit you can set on this correlated value is the Maximum Correlated.
We also include a non-visible, non-configurable threshold called Cross Limit:
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It is only active in the market-making mode (buy and sell, no reduce other orders' sizes, bid and ask for full size), and only if the user has correlated and strategy delta limits enabled via their checkboxes.
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This is designed to help slow down our delta build-up by limiting the increase in the symbols that are nearing their limits, based on the total of Correlated Delta values.
We add up the Correlated Deltas. If this value exceeds 30% of the sum of the Strategy Delta Limits, we stop increasing the deltas in the top 33% of those that have their Strategy Deltas closest to their respective Strategy Delta Limits, in percentage terms.
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Maximum Number of Calls: Maximum number of calls have filled.
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Maximum Number of Puts: Maximum number of puts have filled.
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Maximum Delta Per Strike: If the maximum delta value has been hit for a specific strike, where position delta = position * opt.delta * multiplier.
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Maximum Loss: Measures per-symbol unrealized + realized P&L.
Note: Many of the exposure limiting features are only available in marketing making mode ("Buy and Sell Orders" selected in the Start with field of the Configure Order section.
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Limit Exposureactionstaken what risk limits are exceeded:
Select one radio button to set instruction on what you want the algo to do if it's stopped for one of the stop criteria set in the Limit Exposure section.
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When limit is reached on any selected measure, stop issuing orders which, if executed, would increate that measure beyond the limit. Restart when the measure falls below the limit
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When limit is reached on any selected measure, liquidate positions using REL/LMT/MKT orders. Modify relative order offset as needed.
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If less than x minutes to close, use REL/LMT/MKT orders. Modify relative order offset as needed.
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Automatically liquidate positions x seconds before close, using REL/LMT/MKT orders.
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- From the Option Chains panel, select the options you want to trade using the checkbox. Choose from calls (on the left) and puts (on the right). Check Show inactive strikes to display all strikes. This allows you to add strikes on the fly while the algo is working.
It is possible to select both CALLs and PUTs for trading; calls are to the left of the strike column, puts are to the right.
Use checkboxes per side for option/expiry strike selection.
On selection of a strike, 4 cells become editable: individual order qty and max limit price, per side, per right.
Bid side on the left of the bid/ask, Offer on the right.
In the case of an active algo, the Qtyfields start showing the state of the fills. What exactly is shown depends on the mode in which the algo is run.
Its filled qty / remaining qty for one-sided and grouped.
Its remaining qty for two-sided, non-grouped, will go to 0 if "always bid for the full size" has not been selected.
Its remaining qty for two-sided, non-grouped, will return to Order Size if "always bid for the full size" has been selected.
- From the Control Panel, choose to Preview, Start, Stop or Reset the strategy.
Preview shows one-by-one order preview for a given order, with optional Performance Profile. Transmit strategy at any time by clicking Start. Use Next to see the next leg of the strategy. To leave the preview and return to the strategy, select “Abort.”
Click Start to transmit the strategy.
Click to Stop the strategy.
Use Reset to clear all selections and start again.
Orders are adjusted when the price moves up or down.
Once the strategy has been started, you can see the number of Active Strikes. Manually stop the order at any time using “Stop” in the Control Panel.
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As orders fill, you can monitor Performance data like Realized and Unrealized P&L, Strategy Delta, and Delta Dollars in the Performance section. NOTE that orders created by the Option Liquidity Tool DO NOT display anywhere in
You can add a layout called Option Liquidity Tool Performance from the Layout Library.
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At the very bottom of
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"Browse" the Layout Library.
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Select Options and then select Option Liquidity Tool Performance.
Additional Resources
Learn About Option Liquidity Tool in Trader Workstation at IBKR Campus