When writing a covered call, what's the difference between a “net debit” and a “net credit”?
"When you enter into a multi-legged trade where one is a buy and one is a sell, the limit is expressed as either: The gist is that you don't care what each individual piece costs; you only care what the cost of the bundle is. When you put on a buy-write, you are buying stock and selling a (covered) call against that stock.  That trade will always cost money. Putting on a buy-write will always be done at a net debit.  This is because is is normally impossible for a call to be worth more than its underlying stock price.  There are a few possible reasons there would be a""net credit"" option for what's described as a ""buy-write"":" When you buy a stock and sell a covered call, the call can't be valued higher than the stock, right? How can a call on a $10 stock sell for more than the stock?  So, the initial position of a covered call will cost you something. The transaction is a debit  to you. The net amount of the deal, usually prices as per stock/option single share.  For the image showing net credit, it's as if you expect to get paid for you to take this deal. "I am not familiar with this broker, but I believe this is what is going on: When entering combination orders (in this case the purchase of stocks and the writing of a call), it does not make sense to set a limit price on the two ""legs"" of the order separately. In that case it may be possible that one order gets executed, but the other not, for example. Instead you can specify the total amount you are willing to pay (net debit) or receive (net credit) per item. For this particular choice of a ""buy and write"" strategy, a net credit does not make sense as JoeTaxpayer has explained. Hence if you would choose this option, the order would never get executed. For some combinations of options it does make sense however. It is perhaps also good to see where the max gain numbers come from. In the first case, the gain would be maximal if the stock rises to the strike of the call or higher. In that case you would be payed out $2,50 * 100 = $250, but you have paid $1,41*100 for the combination, hence this leaves a profit of $109 (disregarding transaction fees). In the other case you would have been paid $1,41 for the position. Hence in that case the total profit would be ($1,41+$2,50)*100 = $391. But as said, such an order would not be executed. By the way, note that in your screenshot the bid is at 0, so writing a call would not earn you anything at all."
Yes, as long as you write a call against your stock with a strike price greater than or equal to the previous day's closing price, with 30 or more days till experation there will be no effect on the holding period of your stock. Like you mentioned, unqualified covered calls suspend the holding period of your stock.  For example you sell a deep in the money call (sometimes called the last write) on a stock you have held for 5 years, the covered call is classified as unqualified, the holding period is suspened and the gain or loss on the stock will be treated as short-term. Selling out of the money calls or trading in an IRA account keeps things simple. The details below have been summarized from an article I found at investorsguide.com.  The article also talks about the implications of rolling a call forward and tax situations where it may be advantageous to write unqualified covered calls (basically when you have a large deferred long term loss). http://www.investorguide.com/article/12618/qualified-covered-calls-special-rules-wo/ Two criterion must be met for a covered call to be considered a qualified covered call (QCC). 1) days to expiration must be greater than 30 2) strike price must be greater than or equal to the first available in the money strike price below the previous day's closing price for a particular stock.  Additionally, if the previous day's closing price is $25 or less, the strike price of the call being sold must be greater than 85% of yesterday's closing price. 2a) If the previous day's closing price is greater than 60.01 and less than or equal to $150, days to experation is between 60-90, as long as the strike price of the call is greater than 85% of the previous days close and less than 10 points in the money, you can write a covered call two strikes in the money 2c) If the previous day's closing price is greater than $150 and days till expiration is greater than 90, you can write a covered call two strikes in the money. You can keep the cash in your account as long as you want, but you have to pay a tax on what's called capital gains. To quote from Wikipedia: A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor.[1] Conversely, a capital loss arises if the proceeds from the sale of a capital asset are less than the purchase price. Thus, buying/selling stock counts as investment income which would be a capital gain/loss. When you are filing taxes, you have to report net capital gain/loss. So you don't pay taxes on an individual stock sale or purchase - you pay tax on the sum of all your transactions.  Note: You do not pay any tax if you have a net capital loss. Taxes are only on capital gains.  The amount you are taxed depends on your tax bracket and your holding period. A short term capital gain is gain on an investment held for less than one year. These gains are taxed at your ordinary income tax rate. A long term capital gain is gain on an investment held for more than one year. These gains are taxed at a special rate: If your income tax rate is 10 or 15%, then long term gains are taxed at 0% i.e. no tax, otherwise the tax rate is 15%. So you're not taxed on specific stock sales - you're taxed on your total gain. There is no tax for a capital loss, and investors sometimes take profits from good investments and take losses from bad investments to lower their total capital gain so they won't be taxed as much. The tax rate is expected to change in 2013, but the current ratios could be extended. Until then, however, the rate is as is.  Of course, this all applies if you live in the United States. Other countries have different measures. Hope it helps!  Wikipedia has a great chart to refer to: http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States. The different levels are somewhat related to levels of risk. Writing a covered call is pretty low risk, in the sense that if I buy the stock but sell a call, I now have a lower cost for the stock, and however low the stock drops, I'm still slightly better off than the regular stock buyer. Covered call writing is often used to generate premium income from a stock portfolio, and less as a tool for speculation. Buying a call or put is simpler in execution, but the risk of losing the entire amount spent (I actually avoid the word invested here) due to leverage involved isn't just a possibility — it can be pretty likely depending on the strike price. Put writing and uncovered (naked) call writing can entail even higher risk relative to the premium received — consider extreme moves in the underlying to understand the potential losses involved. The more sophisticated trades are presumed to take a bit more experience and tolerance for risk and each broker has its own set of criteria to allow the client to trade at each level. If you are worried about elections think about writing some calls against your long positions to help hedge.   If you have MSFT (@ $51.38 right now) you could write a MSFT Call for lets say $55. You can bank $170 per 100 shares (let's say you write it at 1.70) (MSFT 01/20/2017 55.00 C 1.73 +0.01 Bid: 1.69 Ask: 1.77) If MSFT goes down a lot you will have lost $170 less per 100 shares than you would have because you wrote an option for $170.  You will in fact be break even if the stock falls to 49.68 on the Jan Strike Date. If MSFT goes up $3.50 you will have made $170 and still have your MSFT stock for a net gain of $520.  $170 in cash for the premium and your stock is now worth $350 more. If MSFT goes up $3.62 or more you will have made the max $530ish and have no MSFT left potentially losing additional profit if the stock goes up like gang busters.   So is it worth it for you to get $170 in cash now and risk the stock going up more than $5 between now and Jan.  That is the decision to make here. "Suppose the stock is $41 at expiry. The graph says I will lose money. I think I paid $37.20 for (net debit) at this price. I would make money, not lose. What am I missing? The `net debit' doesn't have anything to do with your P/L graph. Your graph is also showing your profit and loss for NOW and only one expiration. Your trade has two expirations, and I don't know which one that graph is showing. That is the ""mystery"" behind that graph. Regardless, your PUTs are mitigating your loss as you would expect, if you didn't have the put you would simply lose more money at that particular price range. If you don't like that particular range then you will have to consider a different contract. it was originally a simple covered call, I added a put to protect from stock going lower.. Your strike prices are all over the place and NBIX has a contract at every whole number.... there is nothing simple about this trade. You typically won't find an ""always profitable"" combination of options. Also, changes in volatility can distort your projects greatly." "In double-entry bookkeeping, no transaction is ever negative. You only deal in positive numbers. We ""simulate"" negative numbers by calling numbers debits and credits, where one is the negative of the other. Only a balance can be negative. In this case, Income is a credit account. That means that things that increase your balance are credits and things that reduce your balance are debits. So a gift from grandma is a credit. It's a positive number, and you write it in the credit column. You pretty much never subtract from Income except to correct a mistake. Assets, like a checking account, are debit accounts. Increases are debits and decreases are credits. You routinely have both debits and credits on a checking account, i.e. you put money in and you take money out. Every transaction affects (at least) two accounts: one with a debit and one with a credit. So in this case, the gift from grandma credits income and debits checking. Buying food credits checking and debits expenses." "Think of yourself as a business with two accounts, ""cash"" and ""net worth"". Your goal is to make money. ""Cash"" is what you need to meet your obligations. You need to pay your rent/mortgage, utilities, buy food, pay for transportation, service debt, etc. If you make $100 a month, and your obligations are $90, you're clearing $10. ""Net worth"" are assets that you own, including cash, retirement savings, investments, or even tangible goods like real property or items you collect with value. The ""pay off debt"" versus ""save money"" debate, in my opinion, is driven by two things, in this order: If you start saving too soon, you'll have a hard time getting by when your car suddenly needs a $500 repair or you need a new furnace. You need to improve your cash flow so that you actually have discretionary income. Pay off those credit cards, then start directing those old payments into savings and investments." "There are other good answers to the general point that the essence of what you're describing exists already, but I'd like to point out a separate flaw in your logic: Why add more complications so that ""should I call this principal or interest"" actually makes a difference? Why's the point (incentive) for this? The incentive is that using excess payments to credit payments due in the future rather than applying it to outstanding principal is more lucrative for the lender. Since it's more lucrative and there's no law against it most (all) lenders use it as the default setting."