Sane Bull US Indexes

Saturday, July 25, 2009

Commissions and My Broker of Choice

Many financial newsletters and trading gurus will not include commissions in their returns, usually because every broker charges a different price. While this is reasonable and I understand that, I will list all of my commissions in my posts that relate to actual or proposed trades. I feel it is a more accurate representation of what I do!

The most common commission structure for options is to charge a base fee, and then add a per contract charge. This is the method my broker TradeKing
uses. The base fee at TradeKing is 4.95 and then there is a per contract charge of 0.65, therefore:

1 contract trade: 5.60 or (4.95 +(0.65*1))
2 contract trade: 6.25 or (4.95 +(0.65*2))
3 contract trade: 6.90 or (4.95 +(0.65*3)) etc.

Stock trades at most brokers is flat rate:

TradeKing charges 4.95.

There are cheaper brokers out there, but I like TradeKing for three reasons:
  1. Their customer service is second to none. Any issue is dealt with in a timely manner, and you can contact them online via chat or email or on the phone.
  2. Their research tools are in depth, detailed, helpful and included at no extra charge (except streaming quotes, but a covered call writer has no real use for streaming quotes! The included real time quotes will work just fine, besides if you are only looking at one stock you can go to google finance and get streaming quotes!)
  3. The community. There is a thriving community at TradeKing with forums, a leader board, user sponsored IRC chat and more!

Commissions are a real cost of doing business to any trader or investor of any kind. I will show my commissions on all trades I discuss and include what the cost of doing business is. You will be able to see the commissions in relation to profit and how much of a drain on profits they can be! However, as I pointed out in #2 above, they are worth it if you get good tools from your broker!

Soon, I will start getting to my current open trades!

Friday, July 24, 2009

What About Risk?

Risk (and risk management) is one of the most important topics to any trader, and most investors.
We have seen that buy and hold can be just as risky, (and scary) as any other method of investing. There are very few risk free investment vehicles out there. (A complex options strategy using long stock, a long put and then some other options strategies can be made risk free, but it takes active management and some luck.) We all know someone who has lost it all in ...... insert your favorite investment vehicle. (Real Estate, Stock Market, the Lotto, etc.)

The specific risks here are:
  • The stock. In any covered call the motto to remember is: "the risk is in the stock." The stock could go to zero causing you to lose all the money invested.
  • Loss of upside. This method will rarely produce a gain of more than 10%.
  • The stock! This is the #1 risk, that cannot be over emphasized!
Anyone trading options should read: Characteristics and Risks of Standardized Options from the Options Clearing Corp.

Now, one reason I do in the money covered calls is I get immediate downside protection. If as in the previous post, I spend 5.56 (including my received options premium) for a stock trading at 6.25 with the obligation to sell at 6.00, my stock of choice can drop 0.25 before I don't make my maximum gain and it can drop .75 before I lose money on the whole position. (I have had it happen though..... it can be nerve wracking!)
Of course, if the stock rises to 7, I still only sell for 6, hence the loss of upside, but I give that up for predictability!

All said, this is not for everyone, there will be few home runs and some nail biters, but it is a consistent way to make money!

My Strategy

First, there is an assumption that the reader knows something about the basics of trading, what a share of stock is and some basics of options. If you do not know anything about options, I suggest as a GREAT place to start!)

So here is what I do:
I buy a stock, (in 100 share multiples, i.e. 100, 200, 300 etc).
I sell a corresponding ITM (in the money) option. (I am basically planning my exit at purchase.)

For example:
Buy 100 shares of XYZ stock for 6.25.
Sell 1 contract XYZ AI for 0.70. (This is the front month contract for 6.00. For the example, assume that it is 25-35 days till expiration, since that is generally the amount of time left when I enter into new trades.)
Net cost is 5.55 plus commissions (about 10.55 for one contract. 4.95 for buying the stock, plus 4.95 +0.65per contract for the option sale)
TOTAL cost is therefore 565.55 for the position.

I am planning on the stock staying above 6.00 at expiration. I will then be "called away" (I am using a Call option after all!)
If this happens, I will sell the stock for 6.00 per share, for a value of:
595.05 (6.00*100 shares - 4.95 commissions)

Total gain over the space of a month here is:

Or a one month return of: 5.216% (29.50/565.55)
5+% in one month is not bad, in fact it is DANG Good! It breaks down to a 60+% annual return, and so the obvious question is what are the risks? That will be answered in the next post!


This is my new blog on the covered calls I write!
My goal here is to help others learn ways to make money in the market using my simple strategy!

I am an active options trader whose primary method is to sell short termITM (In The Money) covered calls.

My broker of choice is (shameless plug!)

My next post will detail my strategy more in depth.