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Strategies & Market Trends : The Covered Calls for Dummies Thread

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To: FaultLine who wrote (495)	5/10/2001 10:09:31 AM
From: BDR	Read Replies (1) of 5205

<<So please, I'm not trying to disparage your broker, OK?>> That's OK, you can disparage mine.(g) Let me tell you my own story of broker avarice and client naivete. My broker with E.F. Hutton used options as a way to generate a monthly income in commissions for himself. Obviously that was not what he told me he was doing at the time but that was how I came to see it. This was 20 years ago under the old full rate commission schedule. This was my first brokerage account and I had never owned stocks in my own name before then. Buy and hold wasn't an investment approach that was going provide the broker with the income to support the lifestyle that he wanted to become accustomed to so he talked me, a novice, into selling covered calls each month, rolling up, rolling down as we went. Then he started in with selling puts. The technique did generate additional income but, under that commission schedule, a quarter to a half of it went to the broker. From the broker's perspective trading front month options is wonderful since it guarantees he/she will get a commission at least once or twice each month from each position. I finally pulled the account after some puts were exercised that made me aware of the degree the broker had leveraged my account. When the puts were exercised I was forced to buy on margin stock that represented about two-thirds the value of my then meager account. I did not then and do not now use margin except in very small amounts for very brief time intervals. I just freaked when I saw the statement. Up until then I thought I had been getting sound investment advice from a professional. I woke up to the realization that he had been taking advantage of my naivete to churn the account in a novel way. Brokers already have a conflict of interest in their dealings with their clients and options could just increase that conflict. Furthermore, I assume someone using a broker is not getting deeply discounted commissions on options making it even harder to trade options profitably. But each of us has to make our own investment decisions, including whether to use a broker or not.

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