Covered Calls question?

Question

#1.What is the best and cheapest broker to do covered calls with?

#2.What is the shortest amount of time you can

#1. buy a stock

#2. enter a covered call

#3.it is called and you sell or it is not and expires and can you sell it that day?

Does anyone make money getting in and out this fast?

I assume there is more taxes and lots more broker fees but I assume your risk is less if you could be in and out of the stock in 2 weeks or less correct?

Thanks,

Dan

Answer 1

A call has time value that decreases as expiration approaches.  That can help for covered calls if the stock price does not rise and you can buy your call back cheaper than you sold it for (or let it expire worthless if stock remains below your strike).

You can either buy the stock and sell the call simultainiously or buy the stock and sell the call when you think the stock is peaking and about to roll over.

For American style options an option buyer could exercise their option any time the option is "in the money" (unlikely, but possible before expiration).  You hear about "options Friday", but options in the money actually settle that Saturday.  So if you want to sell the stock without buying back the call, you would need to wait until after the weekend.

But after your call expires that weekend, you could just sell another option with later expiration, and hope that one expires worthless without the stock dropping too much.

As far as the best broker, that depends how many contracts you would trade for each equity.  Some charge a regular trade fee plus a small amount for additional contracts.  Thinkorswim.com lets you trade option strategies (even in IRA) that other brokers might not, and is good for small trades/learning at $2.95 per contract (they only charge me $1.50), and $5 for stock trades.  They also have useful tools (real time quotes and graphs, and theoretical option pricing based on parameters you enter for stock price, date, or volitility).

At Fidelity (silver level) it costs me $10.95 plus 0.75/contract after the first one.  That could cost less for a larger number of contracts, but the only options they approve me for at this time (in IRA) is covered calls.

Answer 2

<<<#1.What is the best and cheapest broker to do covered calls with?>>>

The cheapest for most individuals is probably Interactive Brokers. The best depends upon what you want from your brokerage.

Click on "fees" at

http://individuals.interactivebrokers.co...

to see their prices.

<<<#2.What is the shortest amount of time you can

#1. buy a stock

#2. enter a covered call

#3.it is called and you sell or it is not and expires and can you sell it that day?>>>

As others have noted, you can buy the stock and sell the call option in a single transaction called a "buy-write" transaction.

If you write an option you have no contraol over when or if you get assigned. Unless there is a ex-dividend date prior to expiration, and the dividend is substantial, it is unlikely that a call option will be assigned prior to expiration. Since listed options on stocks only expire once a month, you can only expect assignment of in the money calls once a month.

As far as closing the position with a closing transaction, that is allowed any time including the same day. However if you do it the same day too often you will be considered a pattern day trader and certain requirements, such as a minimum balance of $25,000, will be placed on your account. Also if you have a cash account (as opposed to a margin account) you need to be careful not to violate free-riding regulations.

<<<Does anyone make money getting in and out this fast?>>>

I am sure some people have tried it, but I doubt if many (if any) have done it for very long. I think it would be very difficulat to amke money getting in and out that fast.

<<<I assume there is more taxes and lots more broker fees>>>

More taxes if and only if you make more money. More complicated taxed, always. More trades means more broker fees.

<<<but I assume your risk is less if you could be in and out of the stock in 2 weeks or less correct?>>>

That depends upon where your money is when it is not in that stock. If it is invested in another similar stock the risk is similar. If it is invested in Treasury Bills the risk, as well as the opportunity, is less.

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Remember the the spread between the bid and the ask prices on an option are usually a much higher percentage than the spread on a stock. For example, if the bid quote is $0.30 and the ask quote is $0.40, you can lose 25% of what you paid for the option by opening and closing it without any change its price.

Answer 3

I would recommend TradeKing. They charge $4.95 for buying stocks and options.

Most option traders lets you do the trade together (Buying the stock and selling the option). You can also close the trade(Sell the stock and buy the call back at the same instant) anytime, but you cannot sell the stock as long as the the option is open.

If the option value is more than $.05 during the expiration, there is a possibility that you might be assigned.  you have to wait till the next trading day to find out if the option call is going to be exercised.  

I have used this strategy to buy stocks I like, but has already had a good rally. So If the call is assigned I make money, if not I get to keep the premium and the stock. The strategy works for stocks with momentum.