There are two ways to enter a covered call position. The first is called legging-in where the stock is purchased and then the option is sold. Two distinct trades are executed. The second is known as a buy-write order where the security purchase and option sale is entered as one trade with a net debit limit order.
Buy-Write order
Buy-Write (Net Debit) Order: Some brokerages (OptionsXpress.com, for example) have set up a special combination order type to allow all elements of a covered call trade to be entered at one time. This order type is called a buy-write or net debit order. With this order type, we enter a limit order (execution at a specific price or better is specified) in the form of a net debit. Net debit simply means that WE owe the brokerage money, we pay them. For example, if we buy a stock for $20 and sell the call option for $1, the net debit is $19, excluding commissions. Since the order is specified as a limit order, we pay $19 per share (or less/better) for the order to be executed. The commission for this trade may be slightly less than the cumulative commission charged for each of the two executions warranted to affect a trade by legging in.
Opening a Covered Call Position Using a Buy-Write
Let's look at an example of such a buy-write order (Figure below). In this hypothetical, we will purchase 300 shares of Blue Collar Investor Corp. (BCI) and sell the next month's call option. Here are the current statistics for this hypothetical example:
- Current (Ask) price for BCI Corp. is $28.20
- Current (BID) price for BCI- January $30 call is $0.70
- Net debit is $27.50
Achieving a more favorable fill (execution) for your order can be accomplished when using this combination
