Saving money with combination orders

Updated: Mar 10th, 2017 | Vance Harwood
If you ever plan to trade more than straight long options you should learn to use combination orders, specifically debit and credit orders.
A combo order allows you to execute multiple trades simultaneously at a single integrated not-to-exceed price.  Some examples:
  • Creating a simple covered call position, buying the underling equity and selling-to-open calls
  • Creating a call bear option spread, selling the lower strike call, and buying the higher strike price.
  • Closing out a covered call position.
Combo orders can save you money by:
  • Reducing trading costs—typically commissions are reduced compared to executing the trades independently
  • Beating the bid/ask spread.
  • Eliminating the risk that the market will move against while you are in the middle of creating a two part position
  • Allowing you to explore the best price available on a multiple position sale.
  • Circumventing the $0.05 minimum increments on some option prices.
Combo orders require that you specify whether you want a debit  or a credit order.  Debit orders (sometimes abbreviated “Dr”) require you to put up cash to open the position, for example buying stock, or just going long on puts or calls.  Credit orders (sometimes abbreviated “Cr”) on the other hand deliver cash to you as a result of your trade.  Example credit transactions include closing out a covered call, selling stock short, or a bear option spread.
My mnemonic for keeping this straight:
  • Debit—I go into debt
  • Credit—I get the credit..

Figuring out the order price is the next challenge.   Your broker’s software might suggest a value—but you will probably leave at least a little money on the table if you use this number.  It’s like ordering your combo meal  à la carte rather than buying the “meal deal”.   My goal is to set a price that doesn’t fill immediately, but rather takes several minutes to execute.   When I see a delay I’m pretty sure I’ve gotten close to the best deal available.

I have found that splitting the bid / asked prices is a good starting point for combo orders. If that price doesn’t fill in a reasonable time you can always sweeten the offer.   So for example if I want to create a covered call position with Apple:.

Buy Apple stock    bid 516.01, ask 516.03   (split bid/ask price is 516.02)
Sell-to-open Apple S510 call   bid 17.30, ask 17.60  (split bid/ask price is 17.45)

If your broker’s software suggests a value for this order it would be the ask price on the Apple (516.03) minus the bid on the call (17.30) — for a net debit order of 498.73.

My initial limit price would be 516.02 minus 17.45  which is 498.57

If you get a fill at this lower offer you have saved $0.16 per share.    If your order doesn’t fill after a reasonable amount of time, either the market has moved against you, or your price isn’t sweet enough. Fidelity’s and Schwab’s software will generally allow you to change your price without cancelling your order.  If not —you’ll need to cancel and re-submit to change the price.  Remember on a debit order lower is better for you and on a credit order higher is better.

Partial fills can happen anytime you use a limit style order.   If you are ordering more than unit quantities (e.g., 1 call / 100 shares of stock, or single long/short option pairs) in a combo order you may see only a part get filled.  For example if I want to buy 300 shares of USO and sell-to-open 3 calls the exchange might execute only one third or two thirds of your order.

Generally partial fills are a good thing because it suggests you are right on the edge of what the market makers are willing to do.  Your commission costs are unchanged regardless of how many chunks your order gets divided into during the course of the day.   However if the market closes, or the market moves against you before your order completely fills then you will have to pay another commission if you want to complete your order.  You can prevent partial fills by selecting  “All”  in the “All Or None” (AON) order conditions, but you may need to sweeten your offer in order to get a fill.  I generally put my combo orders in during the morning, and I rarely have a problem.  Either the market won’t bite at all, or if I get some partial fills the order generally completes.

A few other points about combination orders:

  • Orders that mix both stocks/ETFs and options are not automatically handled and generally don’t provide fast execution.  Actual humans have to get involved with these trades, so expect execution in minutes, not seconds after you submit your order.
  • I have seen combo orders go stale  Even though they should have executed they don’t—maybe the brokers lose their sticky notes…   Cancelling and reentering the order will usually trigger execution.
  • You may see a “market” option in addition to the limit option with combo orders.  Avoid these.  Execution may be slow and you have no guarantee of what price your order will fill at..
If spreads are tight and time is of the essence I’ll execute sequential orders rather than take the time to setup a combo order.  I’ll use market orders with very liquid, low spread stocks, ETFs, and options if I’m in a big hurry, but generally I use limit orders with everything.
If you’re cheap and not in a hurry, or if the market is moving fast and you’re trying to create spread-beating, multi-sided positions (e.g., for dividend capture) then combo orders are the way to go.

Back to the oil well

Updated: Sep 28th, 2010 | Vance Harwood

I’m back into USO after selling my shares and buying  back my 24-September S33 calls last Friday for a net credit of $32.97 per share.   Bought USO this morning at 33.01, sold-to-open S33 calls at $0.44.  Breakeven is 32.57, maximum profit is $0.43 per share.    Best case this is a 1.3% return for a 5 day investment.

Playing the weeklies…

Updated: Jul 19th, 2010 | Vance Harwood

Created a covered call position today with SPY at 106.89 and 107 SPY calls expiring this Friday–the 23rd.   The calls sold (to open) at 1.18, giving a 1.2% best case profit for the week if SPY closes Friday above 107.   Fidelity supports trading these weekly options, but apparently Schwab does not.

Weekly options for the masses–SPY, QQQQ, IWM, DIA and others

Updated: Mar 10th, 2017 | Vance Harwood

Anyone that trades options knows that the pace quickens the last few days before expiration.   The delta (the change in option price relative to the underlying)  for the ATM option is still around .5, but instead of gradual changes for the deltas on the strikes in / out of the money, the curve starts resembling a step function, going from zero for out-of-the-money, to one for in-the-money at expiration.   The time decay of the option premium (theta) also accelerates, with perhaps 50% of the decay in the last month happening in the last week of the option’s life.


taken from

All of this is of course modulated by any changes in the volatility of the underlying, and the market in general.

Some traders avoid options close to expiration because of these factors–and others flock to them.    As a covered call writer, I am really attracted to the accelerated time decay of short term options.   I’m not taking any more risk than normal holding the underlying, and I am getting an accelerated decay in the price of the options I am short on.    I will often wait until there is only two or three weeks are remaining on the options to create the position.

Now it can be expiration week, every week for the following Stocks / ETFs (taken from this CBOE posting):

Most if not all brokers support trading on weekly options, you may have to select options on the options chains to see them.  Beware of the listed greeks on these options, the software may not be using the correct time until expiration.



Dividend capture with covered calls—too hot, too cold, or just right!

Updated: Feb 25th, 2017 | Vance Harwood

If you have general questions about dividends see Top 10 questions about dividends.

One strategy for capturing dividends is to buy the stock/ETF and then sell calls against that security as a hedge—a covered call.  The value of the short calls moves in the opposite direction of the stock/ETF, providing a hedge.   There are three major variables with this strategy:

1. How many days before the ex-dividend date do you put the position in place?
2. What strike price do you select for the options?

3. How many days until the options expire?

Your risk profile, playing with these variables, can be generalized into the three situations below:

Too cold (too low a risk)    Calls too deep in the money
  • If you sell deep in the money (ITM) options you may feel you’ve found the golden goose.  The calls provide a great hedge, virtually eliminating risk from your position.   Unfortunately, your calls will almost certainly be assigned the evening before the ex-dividend day.  The owners of the calls are not about to let you get away with collecting dividends with such low risk, so they exercise the option you sold them.  They call away your stock and they collect the dividend.  Your position is closed out—no dividend for you.  The only profit you might have is from any premium present when you created the position (if your net investment was less than the strike price).   Some people use this strategy hoping that their options will not be assigned, and not all are, but in my experience the percentage not assigned is very low.

Too hot  (too much risk)    Calls without enough hedge value,  calls that don’t expire for a long time

  • If you sell options that have a strike price that is at or above the current market price of the stock/ETF you can collect a significant premium, and signficantly lower the risk of having your stock assigned.  However, since the value of the options is relatively small (perhaps .5% of the value of the stock) you don’t have much downside protection.   A few bad days on the market can wipe out a year’s worth of dividend capture profits.
  • Not having your stock assigned is good from a dividend collection standpoint, but it is bad if your options have weeks until they expire.  If your calls have a while to run you will see the premium on your unassigned options increase by about the amount of the dividend on the ex-dividend day.   Since you are short these calls your net profit on ex-dividend day will be about zero.   Until the premium on the option decays away, ultimately going to zero at expiration, your position is usually not profitable.   While you wait for the premium on the call to decay you are exposed to market risk—this can be very unpleasant.


Just right
  • What I have found to be a good combination is:
    • Find stocks/ETFs where the options will expire within 10 business days of the ex-dividend date
    • Create the covered call position about a week before the ex-dividend date
    • Choose an in the money strike price that gives you a premium about equal to the dividend value.
  • This recipe will usually result in a covered call position that will be assigned on the evening before the ex-dividend date.  You typically don’t collect the dividend, but since the option is closed out you keep the option premium which is roughly equal to the dividend amount.
  • The calls will provide a decent hedge against risk.  Not enough to protect against a major market move, but they do provide significant protection
  • If the stock/ETF value goes down after you put the covered call in place then the chances of call assignment decrease—bettering your chances of collecting the dividend.  If you do collect the dividend  the breakeven point on your position is improved, and your maximum profit potential goes up by the dividend amount.
  • If the bid / ask spreads on the stocks / options are significant you will probably need to use a combo order to get a decent profit potential.
  • While ok in flat or rising market—this position will not hedge a serious bear move—be prepared to bail out if the market goes seriously south

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