What could be safer than writing a covered call?

[Santafe]

I am bewildered at my Broker CMC to actually suggest that there be too much risk involved in writing covered calls????
What could be safer than writing a call on an underlying stock that you already hold with no margin attachment?
And yet they tell me the only way I can have access to their online platform to write covered calls is by reaching level 5 ASX options trading level.
I have reached already options level 2., whereby I were led to believe I would be eligible to write covered calls, as that is how they explained it to me when I enquired of them.
Only to then find out when it came time I wanted to do so, that the only covered call writing eligible for at level 2 on CMC Brokers is a Buy - Write facilitation, where you purchase the underlying and write the covered call at the same time.
This is totally inflexible on CMC's account and virtually useless to somebody who would hope to purchase a stock at a low price then hold for some appreciation in price and then write the covered calls for a higher premium.
What is even more insulting from CMC is the fact that while they limit you on writing covered calls at level 2 option trading, they will however non the less oblige you in doing exactly that if you phone in your order to do so at a cost of double the standard option fee of $30 to the then phone brokerage service option trade of $60
Really CMC, who do they think they are fooling with such a cockamamie scam rip off agenda as this.
So now after having enough time with previous experience trading options on the USA market back in the early 2000, with no real demand on option level trading levels of acceptance, and really with no great ambitions to trade options on margin, just a hope to generate some extra income on selling covered calls against underlying held margin free stock. I am hit with the ridiculousness of CMC Brokerage narrative of risk management to deny me as much/
Go Figure.
Now I have to get some extra learning on a whole lot of options style trading that I [predict will never have a need for to reach level 5 ASX criteria, just to do simple covered call trading.
What rubbish.
Alternatively, I may end up over at Interactive Brokers where I am sure they would be more formidable, and fees are definitely cheaper on option trading.

 

[wayneL]

It depends. When options are involved risks can be explained in terms of the Greeks and synthetics.

I agree that the situation you describe seems to be somewhat ludicrous

For example a covered call is simply a synthetic short put. However in brokerland, short puts are assigned a much greater risk than covered calls. Perhaps is because of SPAN risk margin, but this is easily alleviated by having short puts being cash covered.

Don't expect logic with these retail platforms because there isn't any. If you are thinking of going over to IB I would certainly consider that.

 

[rolly1]

I am bewildered at my Broker CMC to actually suggest that there be too much risk involved in writing covered calls????
What could be safer than writing a call on an underlying stock that you already hold with no margin attachment?
And yet they tell me the only way I can have access to their online platform to write covered calls is by reaching level 5 ASX options trading level.
I have reached already options level 2., whereby I were led to believe I would be eligible to write covered calls, as that is how they explained it to me when I enquired of them.
Only to then find out when it came time I wanted to do so, that the only covered call writing eligible for at level 2 on CMC Brokers is a Buy - Write facilitation, where you purchase the underlying and write the covered call at the same time.
This is totally inflexible on CMC's account and virtually useless to somebody who would hope to purchase a stock at a low price then hold for some appreciation in price and then write the covered calls for a higher premium.
What is even more insulting from CMC is the fact that while they limit you on writing covered calls at level 2 option trading, they will however non the less oblige you in doing exactly that if you phone in your order to do so at a cost of double the standard option fee of $30 to the then phone brokerage service option trade of $60
Really CMC, who do they think they are fooling with such a cockamamie scam rip off agenda as this.
So now after having enough time with previous experience trading options on the USA market back in the early 2000, with no real demand on option level trading levels of acceptance, and really with no great ambitions to trade options on margin, just a hope to generate some extra income on selling covered calls against underlying held margin free stock. I am hit with the ridiculousness of CMC Brokerage narrative of risk management to deny me as much/
Go Figure.
Now I have to get some extra learning on a whole lot of options style trading that I [predict will never have a need for to reach level 5 ASX criteria, just to do simple covered call trading.
What rubbish.
Alternatively, I may end up over at Interactive Brokers where I am sure they would be more formidable, and fees are definitely cheaper on option trading.

LOL they are a cfd broker after all. Buy the furtherest otm call possible and enter the position as a bear spread. From what you have told us they will probably want full margin for the bear position though with your long stock not being taken into consideration.
If you are serious go IB.

 

[wayneL]

LOL they are a cfd broker after all. Buy the furtherest otm call possible and enter the position as a bear spread. From what you have told us they will probably want full margin for the bear position though with your long stock not being taken into consideration.
If you are serious go IB.

^^investment advice?

 

[Santafe]

Thankyou for the replies, gives some further food for thought.
Now I am currently in the midst of brushing up on Share trading options trading and margin trading 101, so as to attempt my level 3 and up to level 5 option trading status.
What a right pain CMC and the ASX are expecting me to have to know all this jive, when I are not particularly interested in using any of it for trading. Like specifically, I are not inclined to want to get into margin loan trading by any means, but a great deal of the option trading quiz involves knowing all about margin lending. and yet I searched every where on google for some fixed reality regulations pertaining to margin
lending for share trading / option trading, and it mostly only ever covers everything from the USA stock market.

Are there actual percentage regulations from the ASX or Australian Securities and Investments Commission, or Australian Reserve bank, that sets limitations and boundary percentage rates applicable and enforced when it comes to Margin lending facility. As I see in the USA they have stipulation of the "Federal Reserve Regulation T", that limits an initial stock purchase requirement to a borrowed amount of only 50%, and a maintenance requirement of 25%. But I have searched all over for basic regulated Australian rates of Margin loan criteria, and found nothing of any kind of fixed regulated terms. They must have them, surely, even though the individual brokers often work around them to their own agenda, there must still be underlying regulated boundaries. Just wish someone on google somewhere would make it a plain and simple known fact ???? Any answers or clues are much appreciated.
Cheers

 

[Santafe]

As already mentioned CMC make the claim clearly noted as shown in following image taken from the CMC web site depicting their Options Level Trading eligibility. That at Level 2 you can do Covered Calls.
Then to my dismay, I called in to enquire how to online trade a covered call against a held underlying security and lo and behold are given the short shove cant be done unless you have level 5 option trading. From what I can see depicted is they dont even have a level 5, and yet they tell me at level 2 the only covered call writing I can do is Buy-Write Covered call.
If that is in fact the case, then why dont they clearly proclaim as much, instead of the false advertising deceptiveness of leading people down the garden path?

Anyway, happy to say have reached level 3 that gives me some further capacity to trade a whole lot of option strategies more complex and more risk averse and yet totally useless to what I were seeking, when all I wanted was just a simple ability to write covered calls.
Thanks CMC
Someone needs to put a boot in your Backside

 

[wayneL]

As already mentioned CMC make the claim clearly noted as shown in following image taken from the CMC web site depicting their Options Level Trading eligibility. That at Level 2 you can do Covered Calls.
Then to my dismay, I called in to enquire how to online trade a covered call against a held underlying security and lo and behold are given the short shove cant be done unless you have level 5 option trading. From what I can see depicted is they dont even have a level 5, and yet they tell me at level 2 the only covered call writing I can do is Buy-Write Covered call.
If that is in fact the case, then why dont they clearly proclaim as much, instead of the false advertising deceptiveness of leading people down the garden path?

View attachment 183757
Anyway, happy to say have reached level 3 that gives me some further capacity to trade a whole lot of option strategies more complex and more risk averse and yet totally useless to what I were seeking, when all I wanted was just a simple ability to write covered calls.
Thanks CMC
Someone needs to put a boot in your Backside

Like I said before Australian brokers don't seem to make a lot of sense. The only thing that I can think of is that they are treating the short call as a completely independent and separate trade and therefore under SPAN margin rules, regardless of being covered by the long stock.

 

[Santafe]

Like I said before Australian brokers don't seem to make a lot of sense. The only thing that I can think of is that they are treating the short call as a completely independent and separate trade and therefore under SPAN margin rules, regardless of being covered by the long stock.

I read somewhere recently, the reason for Australian option broker fees being so high compared to USA is because of the illiquidity in the ASX options market. So what I suspect of CMC is they withhold the ease of transacting simple covered call writes from their lowly clients in order to allow them the only alternative of a phone consultation order at twice the broker fee, this way it keeps their brokers, market makers whatever in business while scamming the higher rates. Sounds like a conspiracy theory, but there must be something mercenary and less than user friendly involved.

 

[Santafe]

Aside from the negative aspects on CMC's option trading facility, I still have to give them some due credit.
Their overall trading platform and website facility is pretty straight forward with a lot of good usable worthwhile features
and reasonable fees on straight forward share trading
and the Options platform layout and information access is all good for trading ASX ETO's

But their policy for allowing the most basic of trades a Covered call being limited to the top tier level of options trading allowance Level 5, meaning you almost need a PHD Diploma in option trading, just to write a covered call. is to me a big let down.

If CMC ever lift their game by lowering option transaction fees and making the simplest of option trading strategies more easily accessible, then they would be a decent all round online brokerage.

 

[wayneL]

I read somewhere recently, the reason for Australian option broker fees being so high compared to USA is because of the illiquidity in the ASX options market. So what I suspect of CMC is they withhold the ease of transacting simple covered call writes from their lowly clients in order to allow them the only alternative of a phone consultation order at twice the broker fee, this way it keeps their brokers, market makers whatever in business while scamming the higher rates. Sounds like a conspiracy theory, but there must be something mercenary and less than user friendly involved.

I'd go along with that. ASX RTs, from the perspective of we retail traders, are among the most larcenous in the world IMO, aided and abetted (or perhaps necessitated) by that lack of liquidity.... that is, real retail traders rather than instos.

 

[qldfrog]

I'd go along with that. ASX RTs, from the perspective of we retail traders, are among the most larcenous in the world IMO, aided and abetted (or perhaps necessitated) by that lack of liquidity.... that is, real retail traders rather than instos.

I have to say it is,a great disincentive and i basically gave up options here
Illiquid, expensive so even when a trade went my way, i usually lost money after fees, and you do not want to bank the house as you learn..so death of a thousand cut.i just use bear etf for protection which is less than ideal....

 

[VolatilityBlake]

Hi @Santafe

This is a much more complex topic than it needs to be, but I'll try to keep this concise as possible.

Unfortunately, many Aussie online brokers think it's a good idea to add Aus ETO's, but don't spend the time to build the technology properly, and solutions for bad tech is to deal with a human stockbroker to place a trade. (you'll even find brokers that will force you to call up to place a TMC). Then they'll slap with you with a 2x margin multiplier to protect themselves.

Covered calls are indeed a Lvl2 options strategy, but we need to look at what a covered call is on the ASX.

A covered call is determined by the ASX Clearing house, ASX Clear, who determine the margin, SPAN on your overall portfolio.

To have a covered call on the Aus market, you need to:

Buy the stock, settle the stock, Lodge the stock as "Specific collateral" with ASX Clear, then sell the calls. This is a covered call in the AUS market. For now, it's been moved into the too hard basket for online providers, to sync live with ASX clear - and understand what's actually at risk within a portfolio. without knowing or having lodged stock, the sold call is seen as a naked call... Thats probably aligns with some of the feedback you've received. (Lodging with specific vs general collateral is a topic for another day, but general collateral gives you portfolio margin like US portfolios and can have a real advantage)

@wayneL is right, many brokers will just see the call as naked when placing the trade and not have any logic that you've actually got the stock, resulting in SPAN and not lvl2 trading. sounds crazy just writing that out :0

The US market shines because all this is bypassed, and the brokers determine a lot of the risk and use logic.

Some others have mentioned IB, and they have a logical solution. Because they run a custodian model, only the IB entity has to follow the ASX clear rules in its entirety, then they have some flexibility to how they manage each client within the custodian to meet the overall entities Clearing house requirements. They have a good system using what they know from other markets they operate in. Downside is being in that custodian, and us Aussies have grown fond to the HIN structure and owning our assets ourselves.

The AUS Options market is still suited to full-service advisors because of the tech disadvantage, but obviously that's becoming primitive in the modern world for what a lot of traders want. It's still mainly an Insto market / big money game but has come a long way over the last little while to be fair.

I work with a group of guys that build risk systems for ASX Full-service advisors, and just released a retail ASX Options Trading platform about 12 months ago. (same guys that built the ASX Options Trading Game, but now with new technology). We specialise in ASX Options trading and are great at that - We use logic , CHESS sponsored, Client have own external bank account and you can trade covered calls with Lvl2 options. Logic is - when you buy stock we lodge after settlement, or if you sell a call, see you have stock then lodge as collateral for the sold calls. You can even trade Buy Writes if you want.

And importantly, putting pressure on the ASX for more liquidity (although its 10x better than what it was 5 years ago) on more stocks and cheaper trading costs. We just added cheaper Covered Calls and Cash secured put trading fees, which can be charged per contract, at $3.50 per lot, if cheaper than our standard Pro rate per leg. Makes trading more affordable for higher priced stocks like WES, MQG, CBA when selling calls and puts.

Volatility | Elite Options Trading Platform - Advanced Strategies and Tools

Join the premier online community of sophisticated options traders. Leverage our advanced trading platform to execute complex strategies with precision. Access real-time analytics, custom tools, and exclusive market insights.

volatility.com.au

Hope this helps.

Cheers,
VB

 

[Value Collector]

I am bewildered at my Broker CMC to actually suggest that there be too much risk involved in writing covered calls????
What could be safer than writing a call on an underlying stock that you already hold with no margin attachment?
And yet they tell me the only way I can have access to their online platform to write covered calls is by reaching level 5 ASX options trading level.
I have reached already options level 2., whereby I were led to believe I would be eligible to write covered calls, as that is how they explained it to me when I enquired of them.
Only to then find out when it came time I wanted to do so, that the only covered call writing eligible for at level 2 on CMC Brokers is a Buy - Write facilitation, where you purchase the underlying and write the covered call at the same time.
This is totally inflexible on CMC's account and virtually useless to somebody who would hope to purchase a stock at a low price then hold for some appreciation in price and then write the covered calls for a higher premium.
What is even more insulting from CMC is the fact that while they limit you on writing covered calls at level 2 option trading, they will however non the less oblige you in doing exactly that if you phone in your order to do so at a cost of double the standard option fee of $30 to the then phone brokerage service option trade of $60
Really CMC, who do they think they are fooling with such a cockamamie scam rip off agenda as this.
So now after having enough time with previous experience trading options on the USA market back in the early 2000, with no real demand on option level trading levels of acceptance, and really with no great ambitions to trade options on margin, just a hope to generate some extra income on selling covered calls against underlying held margin free stock. I am hit with the ridiculousness of CMC Brokerage narrative of risk management to deny me as much/
Go Figure.
Now I have to get some extra learning on a whole lot of options style trading that I [predict will never have a need for to reach level 5 ASX criteria, just to do simple covered call trading.
What rubbish.
Alternatively, I may end up over at Interactive Brokers where I am sure they would be more formidable, and fees are definitely cheaper on option trading.

Are you sure? Writing covered calls is normally a level one thing.

 

[Santafe]

Are you sure? Writing covered calls is normally a level one thing.

Well after going through it extensively with CMC support staff trying to write a simple covered call and find access to doing so on their web platform, They told me time and again that I can only do a covered call as Buy-Write, which is totally ridiculously limiting and absurd to say the least.
Then they had the gall to tell me oh you can still do a covered call write if you go through our online phone broker service at twice the normal option contract fee of not $30 regular price, already way over priced, But the absolute out of this world bargain of just $60 for the phone broker covered call write, then they also tell me I need options trading level 5 to do a simple covered call write. After clearly stating it can be done at level 2. ??? What.??? Talk about Bizzaro land over at CMC.
This then was explained the reason I had no access to do covered call writes at the level 2 in their online platform as an online trade. But that this feature of Covered call writing would be allowed me as an online trade facility feature if and when I had level 5 options trading accreditation.
Like I explained earlier seems a total scam, sham at best to keep their phone brokers employed while ripping off clients with over exorbitant unscrupulous contract fees.
But what seems a more reasonable account of all this bureaucracy given from VolatilityBlake above telling it like it is with what appears better understanding.
Summed up well in the one word he used "Illogical"

​

 

[Santafe]

Hi @Santafe

This is a much more complex topic than it needs to be, but I'll try to keep this concise as possible.

Unfortunately, many Aussie online brokers think it's a good idea to add Aus ETO's, but don't spend the time to build the technology properly, and solutions for bad tech is to deal with a human stockbroker to place a trade. (you'll even find brokers that will force you to call up to place a TMC). Then they'll slap with you with a 2x margin multiplier to protect themselves.

Covered calls are indeed a Lvl2 options strategy, but we need to look at what a covered call is on the ASX.

A covered call is determined by the ASX Clearing house, ASX Clear, who determine the margin, SPAN on your overall portfolio.

To have a covered call on the Aus market, you need to:

Buy the stock, settle the stock, Lodge the stock as "Specific collateral" with ASX Clear, then sell the calls. This is a covered call in the AUS market. For now, it's been moved into the too hard basket for online providers, to sync live with ASX clear - and understand what's actually at risk within a portfolio. without knowing or having lodged stock, the sold call is seen as a naked call... Thats probably aligns with some of the feedback you've received. (Lodging with specific vs general collateral is a topic for another day, but general collateral gives you portfolio margin like US portfolios and can have a real advantage)

@wayneL is right, many brokers will just see the call as naked when placing the trade and not have any logic that you've actually got the stock, resulting in SPAN and not lvl2 trading. sounds crazy just writing that out :0

The US market shines because all this is bypassed, and the brokers determine a lot of the risk and use logic.

Some others have mentioned IB, and they have a logical solution. Because they run a custodian model, only the IB entity has to follow the ASX clear rules in its entirety, then they have some flexibility to how they manage each client within the custodian to meet the overall entities Clearing house requirements. They have a good system using what they know from other markets they operate in. Downside is being in that custodian, and us Aussies have grown fond to the HIN structure and owning our assets ourselves.

The AUS Options market is still suited to full-service advisors because of the tech disadvantage, but obviously that's becoming primitive in the modern world for what a lot of traders want. It's still mainly an Insto market / big money game but has come a long way over the last little while to be fair.

I work with a group of guys that build risk systems for ASX Full-service advisors, and just released a retail ASX Options Trading platform about 12 months ago. (same guys that built the ASX Options Trading Game, but now with new technology). We specialise in ASX Options trading and are great at that - We use logic , CHESS sponsored, Client have own external bank account and you can trade covered calls with Lvl2 options. Logic is - when you buy stock we lodge after settlement, or if you sell a call, see you have stock then lodge as collateral for the sold calls. You can even trade Buy Writes if you want.

And importantly, putting pressure on the ASX for more liquidity (although its 10x better than what it was 5 years ago) on more stocks and cheaper trading costs. We just added cheaper Covered Calls and Cash secured put trading fees, which can be charged per contract, at $3.50 per lot, if cheaper than our standard Pro rate per leg. Makes trading more affordable for higher priced stocks like WES, MQG, CBA when selling calls and puts.

Volatility | Elite Options Trading Platform - Advanced Strategies and Tools

Join the premier online community of sophisticated options traders. Leverage our advanced trading platform to execute complex strategies with precision. Access real-time analytics, custom tools, and exclusive market insights.

volatility.com.au

Hope this helps.

Cheers,
VB

Thanks for the heads up on shedding some better light on this ASX fiasco VB
Hoping that in due course the whole system will get its act together in a much more user friendly and more logical way than what is presently at hand.
Cheers

 

[Santafe]

@wayneL is right, many brokers will just see the call as naked when placing the trade and not have any logic that you've actually got the stock, resulting in SPAN and not lvl2 trading. sounds crazy just writing that out :0

As for CMC not knowing the underlying stock is held, that is no excuse for them, after I called in to enquire on writing the covered call, they were well informed and knowing I held the underlying stock as collateral against a call write. So no excuses really suffice.

Even then after knowing those details that are right in front of them when identifying my account they could easily have allowed me to do the trade without the inflationary phone service rate.

Like really what does the phone broker do more than what anyone else with a computer in front of them would need to do to place such a trade with a few clicks on a keyboard and a mouse control.
Yeah that really equates to another $30 extra fee incurred.

Like i said already Bizzaro Land at CMC headquarters.