How do I Place a Limit Order on a Covered Call in Stocks?

A covered call trade involves buying shares of a stock and at the same time selling call options against those shares. To maximize the profit potential of the trade, you want to pay the lowest possible amount for the shares and get the best price for the call options. However, the bid and ask prices of a market order would have you paying more for the shares and getting less for the options. Using limit orders allows you to pocket a few more dollars of profit with every covered call trade.

Step 1

Select the call options for the options side of your covered call trade from the options chain screen of your online brokerage account quote system. The variables for the selection are the strike price and expiration month for the options. Your trade research provides which call option you plan to trade. The covered call calculator provided by your online brokerage account will let you compare the expected returns of different stock and call options combinations.

Step 2

Use the strategy select menu on the options chain to choose the covered call strategy. This is a quick way to get to the covered call trade screen with the stock and option information already included on the screen.

Step 3

Enter the number of stocks to be purchased and call options to be sold. There must be 100 shares of stock for each call option. For example, you may choose to buy 500 shares and sell 5 call options.

Step 4

Locate and note the bid/ask prices for the stock, call options and trade debit quote on the trade screen. For example, if the stock quote is $29.50 bid and $29.55 is asked and the call option is $1.50 bid and $1.60 asked, if you placed a market order for the covered call trade, the net debit would be $28.05 -- $29.55 minus $1.50 -- since you are buying stock at the ask and selling the options at the bid. The other end of the bid/ask spread is $27.90 -- what you would receive to close an open covered call by buying back the options and selling the stock at market prices. The 15 cent difference is worth $75 on a 500 shares plus 5 call options covered call trade.

Step 5

Select limit order on the covered call trade screen and enter a limit debit price between the extreme bid/ask combinations shown on the screen. You only use the debit price and do not need to put in separate limit bids for the stock and options. Using the example numbers, you may want to use a $27.95, $27.98 or $28.00 limit price. Send in the limit order after entering the limit price.

Step 6

Monitor the status of your order to see if it is filled in the first few minutes after you placed the order. A limit order to split the bid/ask prices should either fill or not be accepted by the market in the first 5 to 10 minutes after placing the order. If you do not get a fill, cancel the order and re-enter the order with a slightly higher limit price.

Tip

  • The savings from using limit orders on covered call trades depend on the size of the spreads and how many shares/call options you trade at a time. Working the bid/ask numbers could at least help cover the broker commission costs.
  • Shading the limit price towards the high-end of the range increases the probability of a quick order fill. After making a few trades using a limit price you will get an idea of how far you can push against the spread numbers.
  • Watch the stock price closely as you get ready to trade and after you place the order. A fast-moving stock price will invalidate your limit price assumptions.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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