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Strategies & Market Trends : The Covered Calls for Dummies Thread -- Ignore unavailable to you. Want to Upgrade?

To: FaultLine who wrote (376)	5/2/2001 1:58:53 AM
From: BDR	Respond to of 5205

Since some of us can't agree on what our yields are, I am not going to try to address the matter of risk.(g) But I would like to bring up the issue of transaction costs. I was reminded of this when I got the confirmations for the SEBL buy/write I posted here recently. The account in which I did that has had very little activity and as a result Fidelity did not apply their best commission schedule to the transactions. I have to say that, when my wife and I pointed out the discrepancy in commissions between the various accounts that we have, Fidelity acknowledged that that was illogical and they have now applied their preferred commission schedule to that account as well. They have even credited the account for the difference between the higher and the preferred rate for that last trade. I think they deserve an Attaboy for that. But, to the issue of commissions. Option commissions are usually much higher than the discounted stock commissions we are all used to and can really create a drag on yields if one is doing frequent small trades. For example, Fidelity charges me $14.95 commission to buy any number of shares up to 1000. Their option commissions are calculated thus- $27 for up to 4 contracts and $1.75 per contract above four. That means for 500 shares at $50 I pay 0.0598% (= 14.95/25,000) in commissions. But, if I write 5 covered calls on that position at $1, I pay 5.75% (= 28.75/500) in commissions. That is almost like the good old days on Wall Street before discounted stock commissions. With Fidelity's schedule I have found commissions have made it uneconomic to trade either small numbers of contracts or contracts for small premiums. To their credit they do charge a flat rate of $15 to close out an option position if the premium is less than .25 which helps. Commissions and the bid/ask spread are just friction slowing down the smooth running of any financial transactions but they are much more a factor in options and traders should not lose sight of that. dDR