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Long and Short same equity option, issues issues.
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Long and Short same equity option, issues issues.

  #1 (permalink)
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Long and Short same equity option, issues issues.

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 position.

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”.

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  #3 (permalink)
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  #4 (permalink)
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I see it like this.

Had all positions been with separate brokers you would be up 500+400+990 (for the .99 gain in 1000 shares GE stock) total=1890

If you wanted to create the same risk profile all with one broker the trades would have looked like this.
Sell to open Covered call Breakeven at 24.50....then reversed short call position by buying back short calls for .10 loss=breakeven 24.60.....and then buying another 10 lots for .60 new break even 25.20.
Then sold to close long the calls for 1.00...final break even for stock position 24.20...stock ends the day at 25.99= net gain of 1.79 per share x 1000=1790

the 100 difference is the .10 less when you paid .60 for calls you sold at .50 that would have flattened the position.

Basically you were scalping in and out of the calls....had you reversed your call position one last time back to a covered call when it was at 1.00 you would have made another 1000 which you would not have been able to do were the original short calls still in place without adding buying power reduction. It's just how they measure risk and the computers way of tracking your position. It works to your benefit if you are going to be in and out of the call positions.

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  #5 (permalink)
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trenton nj usa
 
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(Thanks for your precise reply and effort!)

RE:I see it like this.
If you wanted to create the same risk profile all with one broker the trades would have looked like this.
Sell to open Covered call Breakeven at 24.50....then reversed short call position by buying back short calls for .10 loss=breakeven 24.60.....and then buying another 10 lots for .60 new break even 25.20.
Then sold to close long the calls for 1.00...final break even for stock position 24.20...stock ends the day at 25.99= net gain of 1.79 per share x 1000=1790--->

I pondered the above for a bit; am I wrong here: Sell to open nets +500... Buyback .10 loss = -600 to sub-total at -100 (unless I REALLY missed something the buyback monies of $600 didn't go to ME, it went to someone else... can you confirm that; the money spent shouldn't have gone to me since I was paid ($500) already for "those initial calls"...

...then buying another 10 lots = -600 there for a sub-total of -700. Sell to close at 1.00 nets +1000 puts me at +300 sub-total. Stock ends 25.99 gains +990 for a TOTAL of +1290.

SO: Thats 1790 versus 1290, seems like thats 600 less. And I did not buy "another 10 lots" I didnt have the cash, so that made me miss out on $400, in the stick with one broker scenario. I must be really really dense, i still dont see how this is an even bargain, and my math comes out different than yours.

Yes, I do see that freeing up the covered stock to allow additional write-a-covered-call sale can also net some monies. And of course, full service commissions exist with every transaction with Broker A... they do add up. Thanks again, hopefully some comments on these new observations please.


Last edited by rigbyrigz; March 19th, 2015 at 07:45 PM. Reason: math
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  #6 (permalink)
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K..lemme go through it again and see if I got this right.

Transaction A = .50 from max credit of sold calls + .99 from stock price increase = 1.49
Transaction B = Bought for .60 sold for 1.00 net gain = .40 (we don't worry about who gets what money...all we care about is you bought it for .60 and sold it for 1.00 for a gain of .40 in your P/L)

"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."

Ye 500+400=900 + the 990 from stock increase = 1890

So in the first scenario your total gains at the end of the day would be 1.89 (x1000).

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.

If you only did transaction A you would make .50 on the calls + .99 on the stock for net gain of 1.49x1000=1490
Transaction B gained you money because you added to the risk and it went your way and you got out early...had you held to expiration it would have expired worthless thus losing 600 making your net gain 890....which would be the 990 you would have made from the stock position minus the 100 you lost going long calls at .60 while you were short at .50. While the 2 positions were on at the same time they were negating each other. But like I said you were basically scalping the options and changing your risk profile as you went.

I pondered the above for a bit; am I wrong here: Sell to open nets +500... Buyback .10 loss = -600 to sub-total at -100 (unless I REALLY missed something the buyback monies of $600 didn't go to ME, it went to someone else... can you confirm that; the money spent shouldn't have gone to me since I was paid ($500) already for "those initial calls"...

Ye your down 100 if that's all you did. You were paid 500 to open then you paid 600 so your down 100 theoretically. But then you sold for 1000 while collecting the full 500 so net gain of 900 (+990 on stock = 1890)

...then buying another 10 lots = -600 there for a sub-total of -700. Sell to close at 1.00 nets +1000 puts me at +300 sub-total. Stock ends 25.99 gains +990 for a TOTAL of +1290.

Not sure what where your getting the -700...but keep it simple...you bought at .60 sold at 1.00 = +.40 + .99 = 1.39 (but you also sold calls for .50 = 1.89 (1890). The 1790 only occurs if you start with a covered call with a break even of 24.50 then flatten the short calls for .10 loss making break even 24.60 then add .60 in risk on long calls for break even of 25.20 then sell calls for 1.00 making break even 24.20 then the stock finishes for 25.99 for net gain of 1.79 (1790) The 1290 doesn't occur in any scenario unless you don't sell the calls to begin with in which case your net gain would be .99 + .40 = 1.39 (1390)

SO: Thats 1790 versus 1290, seems like thats 600 less. And I did not buy "another 10 lots" I didnt have the cash, so that made me miss out on $400, in the stick with one broker scenario. I must be really really dense, i still dont see how this is an even bargain, and my math comes out different than yours.

That should be 500 less (1790-1290=500) which is the .50 you sold in covered calls if you carried them to expiration. And the 1790 only occurs if you flatten the short calls for a .10 loss and scalp the long calls for .40 profit.
But if you didn't buy any calls at all you would only gain the .99 on stock and .50 on short calls = 1.49 (1490)

Think of it this way...your max profit from the covered calls was 1.50...then if you bought more calls you added 600 in risk and made another .40 in the meantime. Which would be 1.90 (or 1.89 since the stock ended a penny short of max profit)

Hope that makes sense.

Ye if you want to be able to trade more often you will need another broker or platform. I pay 7.50 per stock transaction and 1.50 per lot on options. And that's still a little steep for getting in and out of positions as much as I do.

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  #7 (permalink)
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Thanks for all the tips and help.

I am a complete idiot I guess. You lost me. Are you aware when I bought (to open) another 10 calls at 0.60 (my second transaction) I was not ALLOWED to hold that and sell it a few days later at 1.00 when it went up. I risked $600 (or so I thought) and think I should make $400 for that, BUT no, the broker, following some rules-procedure I think was arbitrary, instead ( a few days after purchase) treated the 10 contracts at 0.60, bought TO OPEN, as a BuyCallsToClose...they negated the position I had from transaction 1, using and cancelling (reversing with) transaction-2 in effect. YES-freeing my stock from obligation and for additional transactions, but basically, depriving me of my $400., as I no longer owned these calls from transaction 2 to sell at 1.00 -

- yes, if I had bought, transaction 3, ANOTHER 10 at 0.60 and held it till a rise to 1.00 and then sold it, yes that would net $400 from another $600 investment spent, but I did not do that. I did just 2 cash transactions.

I didnt NEED to do that (a third transaction) if the transaction 2 was done with a different broker who just let me hold the $600 put IN till it reached 1.00 and allowed me to still have it to sell at that price for $400. That would allow $500 in my wallet from transaction 1 plus $400 from transaction 2 in my wallet.

Of course if the stock appreciates from 25.00 to 25.99 I make $990 on my position, but that happens no mater how many brokers and how many transactions i undertake. So I think it is accurate to ignore the stock-appreciates, or not, aspect, for the comparisons.

Sorry If I am frustrating you. You are not the first. My logic above seems sound. What part of it exactly is wrong? Thanks!

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  #8 (permalink)
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No problem.

If you wanted to reverse your call position all with one broker you would have had to buy 20 lots. This would have flattened the short calls and went long another 10 and would have required another 600 in capital.
And it would look like this:

If you wanted to create the same risk profile all with one broker the trades would have looked like this.
Sell to open Covered call Breakeven at 24.50....then reversed short call position by buying back short calls for .10 loss=breakeven 24.60.....and then buying another 10 lots for .60 new break even 25.20.
Then sold to close long the calls for 1.00...final break even for stock position 24.20...stock ends the day at 25.99= net gain of 1.79 per share x 1000=1790

Then (if you wanted to) when the options were at 1.00 you could have reversed the position again by selling 20 lots. Thus locking in the .40 gain and another 1.00 in premium at expiration making your net gain 2790. Which you would not have been able to do separately without a huge increase in capital requirements.

What you are messing with is one brokers way of managing risk and capital requirements and pattern day trading rules. Imagine if you could maintain all the "buys/sells to Open" separately people would weasel a way to day trade options without being approved for such trades.

Personally I thing the day trading rules are BS and hope they one day will eliminate them.


Last edited by ACstudio; March 20th, 2015 at 01:47 PM.
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  #9 (permalink)
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Opening a second account might not be the most elegant solution to your problem, but then this is options trading... who ever said it was supposed to be elegant?

As it so happens, I have two accounts, with two brokers. One that I currently trade just options in (Account A), and one which trades stocks and options (Account B). I see, based on the subject of this thread, that it might be easier and less complicated to only do covered trades in the one account, to keep from being forced flat if I sell calls on a covered stock.

However, if I do get exercised on a long call in Account A, what then should I do with the long stock position? I would want to be able to write covered calls, but still have the flexibility to 'buy calls to open'.

Surely there's no way to transfer the stocks from Account A to Account B, right?

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  #10 (permalink)
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trenton nj usa
 
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Not everyone agrees that there is some useful aspect to be able to BUY CALLS TO OPEN without it automatically being converted to/treated as a BUY CALLS TO CLOSE just because you have sold covered calls on the same options contract...

...that being said, I think the best answer (other than reporting the unwanted automatic-covert treatment to the SEC and others because they apparently are not really following any edict other than their own standard-practice) is that when you want to BUY CALLS TO OPEN and have it be a totally independent transaction, thats when you go to a second account (Account B) and do the BUY TO OPEN there. There is nothing in Account B to close, of course, so there ya go.

I think it all really stinks though. Why for instance does the brokerage have an online menu selection of transaction BUY CALLS TO OPEN< as well as BUY CALLS TO CLOSE? I know in the old days my full-service brokerage would have seen a BUY CALLS TO OPEN transaction and when they "review it" would have contacted me and asked "what do you really want to do, sir"? Hereadays, they just take liberties... literally doing what they feel like (falsely claiming its the law, and I have thoroughly checked that) never mind what the client obviously wants to do.

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