Running the trade order is where the action begins. If you haven't run a covered call before, don't fret over it. Running the trade is easy as can be. But there are better (and not so good) ways of doing it.

A covered call trade, like the giant slalom race, is not an act but a series of acts. Each act is an opportunity to improve your odds in the trade, or not. Good trading is about using discipline and doing as many things right as possible. Today we look at entering the trade order.

This article assumes that you are using an online broker. Obviously, if you are using a live broker, just telephone the broker and provide the trade details. But online trading is vastly cheaper, and you'll find the execution is as good or better than using a live broker.

Two ways to enter it

There are two ways to enter the trade order. The first is to leg in, meaning to buy the stock and then (only once you're dead sure you've bought the stock) sell the calls. The second is to enter a net order, in which the stock is bought and the calls sold simultaneously. The net order is either a net debit (if it costs you money) or a net credit (if you get more money than you pay). The covered call write always generates a net debit, and closing a covered call trade always generates a net credit.

Legging in is a poor way of entering orders and can lead to very bad fills - - with technology where it is today, there is no reason to leg in. Don't do it. Your trading will be better, because your fills will be better, month in and month out by using net orders.

Enter the trade order

Go to the order execution page of your online stock broker. Virtually all online brokers offer a custom order entry page just for covered calls. In this day and age your broker should be able to execute both the stock and option legs of the trade simultaneously.

Lets assume we are going to buy 500 shares of Cisco Systems (CSCO) and write covered calls on them. We want to pay approximately $19.75 for the shares and sell the DEC $20 Calls for a premium of $1.20, which would result in a net debit (the amount we actually go out of pocket) of $18.55. We will enter a net order that is $0.05 tighter than that, specifying a net debit of only $18.60. The higher the net debit, the more the trade is costing you. This order would be simply and easily entered as shown below:

Example: To run a covered call trade when the stock is 19.75 and the 20 Call is selling for $1.20, the easiest practice is to enter the order as a net debit of $18.55 (19.75 - 1.20). That way, even if the price of the stock and option move, your order still will be filled if it can be filled at the net debit entered. In order to make it more likely that the order is filled, we specified a $18.60 net debit, meaning we were willing to pay $0.05 more for the trade than the 18.55 net debit we were hoping for in the best case. The higher the net debit, the more the trade is costing you.

We bought the stock and sold the DEC 20 Calls to open. The order was entered as a day order, meaning the order expires the same trading day if not executed. How hard was that?

Trade Tip.   If your broker does not allow you to enter a net order, change brokers! The last thing you need to do is to buy the stock and then chase an order to sell calls at an attractive price.

We could have entered a market order, which instructs the brokerage to buy the stock at the current market price (which will be the asked price) and to sell the calls at the current market bid price. In reality, the trade can go off at very different prices than those shown when you put in the order. There can be orders ahead of yours, and the stock or option prices can move before your order is filled. We never use market orders to run a trade, and usually only employ them when it is necessary to get out of an adverse trade quickly.

Caution: No matter how you are finding your trades, before hitting the Submit Trade button, double check that the covered call you are selling is the one you intended to sell. Option symbols are funny creatures, and there are some odd ones out there due to splits, mergers and other activities.

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