Trade King – New Rating Service

Trade King online brokerage has added the services of MarketGrader.com to its stock reporting services.

It looks like a service to give a quick useful snapshot of a company you are interested in.

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Cost Review-Trade King does well

Value Blog Review: Discount Online Option Stock Brokers

A review of commission costs for options on the most popular on line brokers. Trade King came out quite well.

Picking stock for Covered Calls

A comment on my last post asked how I picked the stocks I write covered calls on. Here is a short outline:

  1. I use the option scanner available from Trade King to get a list of stocks in the price range I want to trade and with the volatility I am looking for. For example I will scan for stocks trading from $10 to $15 with volatility from 40 to 80.
  2. I then start reviewing the stocks using Yahoo Finance and Motley Fool CAPS to weed out some that look good too me. I am looking for profitable companies with recent good financial news and good stock price trends. I try to diversify industries with the few stocks I am able to write covered calls on so they are not all affected by the same news. This usually narrows me down to 5 or 6 prospective stocks.
  3. I then use a covered call calculator to find the possible returns on the stocks I have found. I look at options expiring for the next two months and would like to make 3% to 5% per month if called. 2% to 3% on the option premium if uncalled. This will usually get me 2 good prospects for covered call writes.
  4. I then try to place trades and get filled at the prices that make sense to me. These stock sometimes have quite low option volume, so getting an order filled may not be possible at a price I like.

I try to be flexible with this process to not pass on stocks that may be a good investment. I also keep an eye out for stocks that may be good future covered call prospects, so when my current positions expire I have some new prospects to study.

Good questions, Jennifer

Jennifer’s question from my previous post: LINK

There is the rub of writing covered calls: What if the stock price goes down. The answer is: depends. Primarily on what you think of the stock/company at that time. Is it down because of company news? Is it down because the market in general is down? Do I think it will recover?

I have gone through all of these over the last 5 months that I have been writing this blog. I have developed a couple of rules of thumb:

  • I try to buy slightly out-of-the-money (3-5%) covered call positions and make 3-5% per month on the option premium, 1 to 2 month options, net of commissions.
  • If the stock is called I make a little extra, if not called I want to be able to write a call again at the same strike price and make a decent return. I will not cry if I get to sell several contracts before the stock is called away.
  • If the stock falls to the point that there is little to no premium at your strike price for the forseeable future (4-5 months), seriously consider buying back the option and selling the stock.
  • Your opinion of the underlying stock/company plus what the overall market action has to determine whether you keep a falling stock on the belief it will recover or you sell and reinvest elsewhere.

Having said all of that, I believe I have held on to my losers to long in the past and try to make an early decision to sell.

As to the actual trading, it is not hard. You can go to the Trade King website and click through the screens to see what they show. Once you have an account open you can enter trades in the screens and see how they work. You get a preview before the trade is sent in so you can cancel if you want. You can also easily cancel pending trades.

Start small, pick out a trade you would like to make and see if you can get it filled at a price that works for you. If you have a stock in mind let me know and I will review some trade possibilities for you. Your questions give me good stuff to write about.

Comment answer

Jennifer asked a question on getting started trading covered calls. Thought I would post my answer again:

Jennifer,
I hope reading through this blog helps you get some understanding about covered calls. I have been reading about option trading for years, and finally wanted to give it a try so I opened an account using the funds from a small IRA I had in a mutual fund. I started with about $4000.

I think the best way to learn is to just open an account and make some trades. Once you have an account (I use Trade King) you will find trade screens set up for the different option strategies. There will also be research tools to help you find trades. I use an option screener to find stock in the volatility and price ranges I am interested in.

I have found that I am developing a strategy that works for me and my temperament. Everyone that trades has their own style. Read the blogs in my blog roll and read others that you find interesting.

Effect of Commissions

In my previous post, I gave the details of a recent covered call trade. If you add up the commissions for a called covered call trade, the total commission for a 100 share/1 option trade is $15.50.

To diversify my account I am making trades in the $1000-$1200 range, to give me up to 4 open positions at any one time. This makes the commissions approximately 1.5% of of each round trip trade. If I average trading the portfolio 9 times a year (50% one month trades & 50% two month trades), my total commission costs are 13.5% of the portfolio value.

Obviously it is important to figure all trades net of commissions to see if the profitability is acceptable. A 3% raw gain reduced by half becomes unacceptable.

If a stock is not called and I can write another call on the same stock the cost for that round trip is reduced by 1/2%.

The biggest thing I can do to reduce the negative effect of commissions is to trade in larger dollar amounts. Trades in the $2000 range reduce the commission drag on gains by half. So as my account grows, the results should improve just by the lower percentage that will be taken by commissions.

Trade King online brokerage

Trade King has worked very well for me as the brokerage for my account. They have low fees and a ton of information on their website. I have learned a lot over the last couple of months just from the info available there.

Trade King has a $50 referral fee paid to account holders (i.e. me) who refer by email someone who opens a new account. I have added a link in the right column of this blog if you would like to have information from Trade King emailed to you. If you open and account I would be paid the referral fee. I think it is a great idea, but do what you want, no pressure.

Trade King referral