Test run of Zecco Options Trading

A few weeks ago I signed up for Options trading privileges from my brokerage, Zecco.com, and today my options access was granted.

The basic idea is simple. I have shares of a company in my regular trading account that I'm willing to sell and make some profit on. In the mean time, I intend to sell "covered calls" so that I earn money from the shares until they get sold. Basically, it means that someone will pay me for the right to purchase my shares of stock if it rises to a certain price. The risk is that the stock will rise the call will be used by the buyer. One of the nice things about Zecco is that you can have a pretty girl explain this and other investing techniques to you. Another explanation can be found here: http://www.mindxpansion.com/options/sell-calls.php .

I logged in today full of excitement, and then discovered I had no idea how to actually execute the sale. There are something like 11 fields to input information into, and I need to learn the right way to do it.

  

My starting point is the Zecco.com education section. I know basically, what I want, I just need to figure out how to tell that to Zecco. Sadly, zecco was less than helpful on the specifics of executing the trade. I was able to figure it out with an hour of experimentation and internet research, but it should have been easier.

My trade type options are: BASIC, COVERED CALL, LONG/SHORT ROLL OUT/ MARRIED PUT.  I'm trying to sell a covered call, but it looks like when I select that option it forces me to buy the underlying stock at the same time, which I don't need to do. I'll stick with basic for now.

My transactions options are BUT TO OPEN, SELL TO CLOSE, BUY TO CLOSE, SELL TO OPEN. Once again, I'm not sure so I'll look it up. It turns out that each option transaction has an opening and closing phase, unlike a stock which you can hold indefinitely. Since I'm writing a covered call, I want to SELL my option contract to OPEN the transaction. 

The rest of the fields aren't quite as obscure.

• Contracts: The number of options contracts you are writing or buying. One contract is generally for 100 shares of the stock, so I only want to write one contract.
• Symbol: is the stock ticker symbol.
• Expiration: is the last day on which the options can be exercised. 
• Strike: is the price you will sell (buy) the stock at.
• Order Type: Limit or market. Market means you will pay the best asking price around, Limit means you will only pay a certain price or better. I prefer limit orders because it is easy to know what you will pay.
• Limit Price: Is the maximum you are willing to buy/sell a stock or option for. 
• Duration: Either Day, meaning you will only buy/sell at that price for one day, or GTC, good till canceled, meaning you have to explicitly cancel the order.
• AON: All or none; if you check this all of your order must be executed at the specified price.

To actually execute an options trade I found you had to look up the options chains for that stock, which is step 1 circled in the picture below. You just enter the stock symbol and select the "options chain" link.

 
 

Step 2 is to select the option date and price you want. The default is the closet to expiring options, but you can select future months/quarters. I chose 19Jun2010. As you can see, the higher the strike price, the less money people are willing to buy the option for. Also, as you get closer to the expiration date, the cheaper the options sell for. Once you click trade, most of the boxes are filled in automatically at the top. I couldn't fill in some of the boxes on my own, so it makes me wonder how generic contracts get written.

Step 3 is to enter the type of transaction (Sell to Open) and the number of contracts. I'm only selling one for now, to make sure I really do understand the process and don't make a huge blunder.

Finally I previewed the order:

 

Expected Proceeds of $56.00. Nice. Now I just hope that F doesn't quite hit 13.00, and so I can sell it again next quarter.

Comments

[thomasgalvin]

Very practical and useful advise.New traders should be required to read this post.
Especially in commodities. So many retail investors are getting killed due to lack of understanding of the decay built into some of these tickers.

[Trading Education]

You do have to provide your social security number to them over a secure connection in order to verify your identity.I have used Zecco for about four months now with very good results.I am not a particularly advanced options trader,so I think they would be fine for you as well Tic Tac.

[bobby w]

There's a good covered call screener here: http://www.borntosell.com
No pretty girls there, but a really good screener to find high yield covered calls.