Multi Leg Trade Tickets

Malcolm Myles on

Hi Clubbers,

Multi Leg Trade Tickets was a topic Wednesday... I use this technique sometimes when trading options. I use it in two circumstances - a Buy Write and a Roll Out.

Buy Write: This is when you are trading a stock and an option, you don't expect to keep the stock. You Buy your stock position and, at the same time, Write a covered call for the position. The expectation is that you'll get the premium and the increased valuation of the stock. For example:

B 100 AAPL @ $447.25; STO 1x AAPL 13-04-05 450.00 C @ 4.50

If the trade works by next Friday (stock closes above 450), you'd get $2.75 in stock appreciation and $4.50 in premium (2.75+4.50 = 7.25*100shares = $725 minus your commissions). It doesn't work if the stock drops - gain premium, loose valuation. Or if the stock rockets - gain premium, but you sold off gains over the strike.

I've seen this called a Combination Trade "Buy Write" (StreetSmart Edge) and an All-In-One Trade Ticket "Covered Call" (OptionsXpress). You have to be a little cautious with this type of trade because having two legs - the buy and write - your broker is limited in his ability to fill both sides at the same time. You will typically have to set one price for the trade - the market price for the stock and the bid price for the write. This may not be optimal but if you want perfection in your trading... you'll be left 'wanting' for your whole life! The price you will pay is characterized as "limit debit" or "limit credit" depending on which side of the trade you take. As the buyer of stock and seller of the option, you will look to limit your cost (debit) on the trade.

I have to say I don't like the lack of decisive control with a Buy Write ticket... I don't know enough about the movement of the stock price in relation to the option price given the information shown on a B-W screen. However, I have used them on occasion for this reason:

Cost of transaction for the two leg ticket is less than cost for two one leg tickets.

If I Buy the stock, it costs me 8.95. If I sell the option, it costs me 8.95. So to set up the position I'll pay 17.90 plus those irritating "transaction fees" so a total of, oh, 18.65. If I do a B-W, it counts as one trade at 8.95 and transaction fees (higher) that total around $12 or so. Transaction fees vary for some arcane reason that I have yet to divine. But you get the idea - lower Broker costs make you less Broke!

Roll Out: This is when your existing option position has reduced in value to such a point that it may no longer be worth keeping it open AND you can write a new position for next month (either same strike, higher strike or lower strike - roll out, roll out and up, roll out and down). I use this type of two legged trade ticket frequently. Again, it lowers the cost of your trade as you perform two trades in one transaction.

Apple again... I know, but the Fuji's are hitting market and they are so good!

Existing position - 100 shares of Apple with a 13-02-22 470.00 C

BTC 1x AAPL 13-02-22 470.00 C; STO 1x AAPL 13-02-22 450.00 C ticket entered on 2/20/13 (two days before expiration).

I set up the trade as a Combination Trade "roll out" and entered my limit debit price at close to the market price. The trade sat for a while and then hit. I had done my Cool Tools spreadsheets for both sides of the trade and the premium returns were good so I placed the trade. I didn't know what the option premiums actually were until I got notification of the trade.

BTC 470.00 C @ $0.45 (ask price) and STO 450.00 C @ 5.23 (bid price) for a net of $4.78 x 100 = $478 for TWO DAYS OF "WORK"!

The new option ended up expiring worthless and I wrote another the next week. Cost for the trade ticket $10.48 spread across two transactions (vs 8.95+8.95+fees if I went with two trades).

I use roll out tickets on or near Expiration Fridays or when the stock has had an unexpected movement that drops the premium to less than 10% of its original value during its life span. However, I don't do these trades just because I can... and here's an live example:

3/19/13 STO 1x AAPL 13-03-28 440.00 CSP @ 4.50, APR 36%, net $441.05 (five days of minimum wage pay)

Stock has been a roller coaster and coming up on an early Expiration Day (markets closed on Friday), my option premium has dropped as low as $0.10. Today it is back up to $0.29 as the stock is continuing yesterdays fall. I could do a roll out to next week at the same strike of 440.00 and make another $360. I could go out farther and make more on the same strike or even a lower strike. HOWEVER - with a three day weekend and with the significant Market Risk involved in those three days, I'm not confident that I'll have a reasonable probability the Markets will open Monday without some grudge against my awesome stock selection skills. I'll let it expire or BTC before the close today. I want my cash to be mine and unencumbered through the weekend and at the open on Monday. Gives me time to research other positions and continue my education.

A cautionary note: I have yet to be hurt in my trading of Apple covered options. However the condition exists that I could suffer a loss on my position if Mr. Market were to become aware of my prowess and take offense. IF I have a CSP and I'm put the stock, and the stock continues to drop, I could suffer a valuation loss on my position that would be difficult to make up. There are a lot of smart people out there holding on to Apple shares that cost them $700 plus! I could also "suffer" if I hold a stock position and get called away as the stock climbs. I don't consider "coulda made more" as a risk.

It isn't all roses all the time and you need to do some soul searching on Apple if you're going to trade. The best we can do is to attract Lady Luck to our side by being educated about the stock and the environment where it exists.

Have a wonderful Easter Weekend - ours will be status quo, Easter Dresses and Winter Coats.

Malcolm

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