This morning, I executed a covered call transaction on IBM (you can find the Tear Sheet for this strategy on IOI Tools Reading List). As I was starting to execute the trade in the same way I always do — enter the stock transaction, transmit; enter the option transaction, transmit — I started to think “perhaps there is a way to trade this structure as a unit rather than as two separate legs.” I have heard people talking about their trading platforms being able to do this, and I thought that mine (Interactive Brokers) would be able to as well.
Fumbling around with it, I found a way to trade a covered call as a spread, specified my contract and shares, and hit transmit. When the confirmation came back, I was surprised in an unpleasant way…
Namely, my option transaction had been executed far off the market, so my Effective Buy Price was not nearly as good as I might have gotten if I had executed the legs separately. This is mostly my fault. I wasn’t sure how the limit order on the spread worked, so simply hit the Transmit button when I saw the order was correct. However, it was a surprise to me to see how large of a haircut it was ($0.15 per share or so).
I had never tried the spread order before, so I thought it would be good to educate myself about how it worked. I may have saved a little something on transaction costs, but it did cost me an extra $15 per contract in opportunity cost to learn this lesson.