Options Academy
Covered Calls 103: Selecting & Executing the Perfect Trade
Do you buy stock first, or sell the call first? Neither. Learn why "Legging In" is dangerous and how to use Net Orders to execute trades like a pro.
The Execution Dilemma
When establishing a covered writing position, the question often arises: Which should be done first - buy the stock or sell the option? The correct answer is: Neither!
You should execute them simultaneously as a single "Net Order" (also called a Buy-Write).
If you "leg into" the position (buy stock first, then sell option), you expose yourself to risk. If the stock drops before you sell the call, you lose money instantly.
What is a "Net" Order?
Suppose XYZ stock is $43 and the Call is $3. You want to be in the trade for a net cost of $40 ($43 - $3).
You place a "Buy-Write" limit order at $40.00.
This tells your broker: "I don't care if I pay $43.10 for the stock as long as I get $3.10 for the call. Just ensure my total cost is $40."
This guarantees your break-even point and return profile.
What a Difference a Dime Makes
Paying an extra $0.10 for the stock or selling the call for $0.10 less might seem trivial, but it eats into your ROI significantly over time.
On a 500 share trade, giving up $0.10 is $50. If your max profit was $500, you just gave away 10% of your profit potential due to sloppy execution.
Using limit orders prevents this "slippage".
Selecting the Strike: In-the-Money vs Out-of-the-Money
In-the-Money (ITM) Writes: Defensive. Higher probability of profit, lower max return. Use when neutral/slightly bullish.
Out-of-the-Money (OTM) Writes: Aggressive. Lower protection, higher max return if stock rallies. Use when you are bullish.
The "Combined Write": Buying 1000 shares? Sell 5 ITM calls and 5 OTM calls to blend safety with upside potential.
Key takeaways
- Always use a "Net Debit" or "Buy-Write" order to enter.
- Legging in creates unnecessary directional risk.
- Slippage of just $0.10 can destroy 10% of your profit margin.
- ITM is for safety; OTM is for growth.
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