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I have been doing some research and am thinking of selling a Covered Call on a stock I currently own and am planning on holding long term. I would like to make an Out-of-the-Money Covered Call (OTM CC), which from my understanding limits my potential gains but would allow me to pocket the contract premium and only have to sell the stock if the option became in-the-money (Stock price went above the call option strike price). In that case I lose out on any gains above the strike price, but since the strike price would be set higher than the current price I would still sell the stock at a profit.

That sounds good to me, but what I am not sure about is the fees that my brokerage will charge. I currently have the Advantage program from Sharebuilder.com, which states the following fee structure:

  1. $7.95 per real-time trade
  2. $0.75 per options contract
  3. $30 per early exercise, no trade commission for "long call or put options positions"
  4. $20 per automatic exercise, no trade commission for "long call or put options positions that finish in the money"
  5. $20 per assignment, no trade commission for "Owners of short call option contracts that are assigned an exercise notice prior to expiration or let their short call option finish in-the-money"

Number 1 is what I am use to paying to buy or sell stocks, and for options trading it appears they add $0.75 per contract. I'd only be selling one contract (100 shares), So I assume the base trading fee would only be $8.70. My concern is regarding the option exercise and assignment fees. I believe OTM CC options are short call options, so the early exercise and automatic exercise fees should not apply, but I could be wrong. I understand that calls are usually automatically exercised by the owner when they expire if they are in-the-money, but I also read that "The option holder has the right to exercise his or her options position prior to expiration regardless of whether the options are in- or out-of-the-money". I assume this means that if the option expires in-the-money or is assigned I will receive an additional $20 fee.

This means my total fees for one OTM CC would be $8.70 up front and $20 if it is exercised. Is this correct? Are there any other fees I should be ware of?

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You're basically correct, but this may help:

  • The exercise fee is irrelevant. You don't own an option, so you can't exercise it.
  • The assignment fee is a risk, but one that you can generally control, since early assignment, while possible, is extremely rare. As a general rule, early assignment of a call will only occur when an option is very deep in the money and a dividend is about to be paid.
  • If the option is in the money at expiration, and you haven't bought the option back to close, it probably will be assigned, but since you know when expiration is, you have the ability to buy the option back prior to then, thereby avoiding that fee.
  • You should assume that you're going to pay $8.70 at least once (on the way in), and maybe twice (if the stock is above the strike at expiration and you have to buy the call back).
  • That means that you need to be happy with the premium you're getting in exchange for sacrificing the upside above the strike after you back out $0.09-$0.18 per share in fees.
  • So if, for example, the calls you're selling only have $0.25 in premium, you may want to reconsider, as you'll likely be giving 35%-70% of the income in fees.
  • How is the $8.70 calculated? – Dmitri Zaitsev Jul 29 '15 at 12:43
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    @DmitriZaitsev it's the sum of the flat, per-trade charge ($7.95) and the incremental, per-contract charge ($0.75). – Jaydles Jul 29 '15 at 19:14
  • Thanks! I forgot the flat-charge was still there - didn't expect it to be the same for the options though. – Dmitri Zaitsev Jul 30 '15 at 3:52
2

Your answer looks correct. It's the buyer of the option that's long, not the seller (you).

If you're doing a lot of trading, you might get hit with wash-sale rules and you could be taxed at the short-term capital gains rate, which is higher than for long-term gains. But those aren't direct fees.

  • The wash sale rules don't generally apply in a negative way here. – Jaydles Nov 11 '10 at 23:31

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