In trying to resolve some order-entry issues with my broker, I have been told (in delicate language) that I am out to lunch and ignorant about my perspective on “being both long and short on the same equity interest “ as being anything other than a zero/wash/flat
While a financial advisor/friend sees my perspective, the broker’s compliance manager, a FINRA’s options rules specialist, and an Options Clearing House investments advisor say that about my transactions positions. I wonder what you all think and what I may be missing, if I am indeed wrong. Thanks in advance! (The position details below are hypothetical but a similar case is real.)
Transaction A: (as) I own 1000 shares of GE stock. Stock Price is 25. I sell (to open) 10 contracts
with strike-26-calls expiring April 15. I receive 50 cents a contract
, so get $500, less commissions and fees. The broker puts $500 cash in my account on the settlement date. I consider it a done deal other than the naked protection. So I can buy $500 worth of candy tonight with the funds gained. Broker is “X”.
I cannot sell the GE before April 15 or thereabouts in case it is exercised and assigned, as I don’t want to be at risk, or naked. So I keep the stock, unencumbered by any other contracts, “available” until then (April 15.) Of course I am out any gains that accrue to the stock above $26 in the interim. I cannot leverage the stock writing new covered
calls in the interim.
Transaction B: Using a different broker, broker is “Y”, I execute another transaction tomorrow. I “Buy calls to Open” again 10 contracts, GE April 15 Calls-26, and pay sixty cents each. So it costs me $600 in cash, plus fees and commissions. It is, let’s just say, “coincidental” that it is the same equity option interest as in Transaction A...
...It is now April 1. The option I hold with broker “Y” – “am long in”, resulting from Transaction B, is worth $1 a contract now, as GE is near 26. So on April 1 I “sell calls to close” with Broker “Y” and receive $1000 cash, less commissions and fees, on settlement date. My profit from Transaction B is about $400.
On April 15 GE closes at $25.99 and the obligation from Transaction A is not exercised/assigned. I can now do whatever I want with my 1000 shares of GE. I have about $900 total gains (proceeds $500 + $400) from the 2 transactions, and while there may have been better ways to make more money, I am not unhappy.
I feel that from March 19 through April 1 I am what some experts are saying is “long and short in the same instrument” and they imply there is no financial gain or benefit from such a position.
I contend that if I just did Transaction A, and nothing else (certainly no Transaction B) I would have my 1000 shares on April 15 plus $500 cash proceeds as a gain, rather than $900. So Transaction B gained me some money. I think this is simple math and logic, and results from it not being a real long/short same position, because one position had spread and leverage that affected my wallet, and one (Transaction A) could not any longer do that. So B does not really “exactly cancel” A.
Now here is the ACTUAL case. I completed Transaction A with Broker “X”, then a few days later I did (using online system for this full-service broker) an entry-order exactly like Transaction B above; I attempted to “Buy calls to open” 10 contracts GE April 15 strike 26. The order was held, reviewed, opened, and then fulfilled. The case premium
was settled and deposited...
...please note that Broker “X”s online system also had an order entry selection of “Buy calls to close” which is the standard terminology for buying back your position to flatten it out and remove your obligation to possibly deliver the stock on or about April 15. I did not select “Buy calls to close” though; I successfully executed (or thought I did) a “Buy calls to open” with Broker “X”.
A few days after it settled, Broker “X” computer system adjusted my account from showing 2 positions – one from transaction A – 10 covered contracts “written” having some import until April 15, and the 10 contracts from Transaction B... to being a no-position-exists. They effectively treated Transaction B as a “Buy calls to close”. They claim options and securities rules prohibit a client from having both a long and short position on the same equity interest in the same account. Had I done Transaction B with the account with Broker “Y” it would have gone unnoticed...
...in fact, FINRA and Options Clearing House and other sources indicate there is no regulation per se that prohibits this. They suggest this is just how the broker elects to comply with some apparently standard treatments in the industry. Further, they see nothing wrong with this “elected treatment” because (as they somewhat enthusiastically point out) to have a long and short position on the same equity interest makes no financial sense.
Even if (I agreed) that were true, I find the full-service broker’s online system accepting a “buy calls to open” transaction order entry, verifying and executing it, then only days later revisiting the transaction as a “buy calls to close” and thereby adjusting my account to “no position” – to be highly objectionable. You may or may not agree. But what interests me most is the “no financial sense” tag. Because of this adjustment, I no longer have 10 contracts of GE April 15 strike 26 to sell on April 1, for a profit, if I wish to. So rather than the $900 net gains I would have on April 2, I will have –$100, the original $500 gained less the $600 spent on the undesired “reversal/close”.
Yes it’s true that the removal of the assignment/exercise position allows me to write new contracts on my 1000 GE shares and pocket some sort of new premium as compensation. Is that what they mean when they say the long and short cancel each other out; that they are judging that such a new transaction’s premium would negate the missed opportunity net $100 loss? The math may not be as flat as that portends, but I am hard-pressed to see any other reason for them to claim my “disallowed” transaction attempts to make “no financial sense, or difference”.