Buy-Write Trade Setup

• A buy-write trade can be set up in your brokerage account in a couple of ways. The option trading screen will have a pull-down menu where you can select buy-write or covered call. The option quote chain will also allow you to select a specific call option and then select covered call from a pull down menu. The covered call trade screen should be populated with the stock symbol and price and the call option symbol and price. Stocks purchased must be in multiples of 100 shares and one call option is sold for each 100 shares of stock.
  
  

Buy-Write Price

• The buy-write trade price is entered as a net debit to your brokerage account. For example, if the stock is at $25 and the call option is priced at $1.50, the trade price is entered as a debit of $23.50. The cost to enter the trade will be $2,350 for each 100 shares and matching call option plus commissions.
  
  

Bid-Ask Prices

• The pricing of stocks and options is not as simple as outlined above. Both stocks and options have bid and ask prices with a spread between the two. The actual prices in the buy write screen could have the stock at $24.98 bid and $25.02 ask. The call option may be $1.45 bid and $1.55 ask. A buy-write issued as a market order will be filled at the stock ask and option bid, in this case $23.57. This price is $7.00 higher to the trader for each round lot.
  
  

Use Limit Order to Split Bid-Ask

• As the stock price moves up and down, the call option price will go in the opposite direction, leaving the buy-write near a net $23.50. A limit order can be used to split the bid and ask prices and lower the cost of the trade. Using the bid-ask examples above, the buy debit is $23.57 and the sell credit is $23.43. The buy-write trade screen will allow you to select a limit order and put in a limit price such as $23.50. The trader should monitor the trade to see if it fills or adjust the limit price a few cents to get a market maker to take the order.