MB Trading - Is this correct practice?

C

CloroxCowboy

This may be a really noob question, but I am just getting into trading options.

I had an interesting conversation with a rep at MB Trading yesterday. He informed me that when I write a covered call (or any option for that matter), the premium is not deposited as cash in my account, but is held separately by Penson (the clearing firm) until the call expires, is assigned, or is sold.

So I can't use the premium as cash and I don't collect interest on it. I feel like I'm on drugs or something, but that's not the way covered calls are supposed to work is it? What's the point of writing an option if Penson is going to hold my money and dole it out to me only when they see fit?? Also, I have to assume that Penson is collecting the interest on MY premium while the option is in force...

Can anyone shed some light on this for me? Seems pretty shady.
 
Thanks for the response. Shouldn't that premium be part of the new buying power? How is the account credited if you're not allowed to spend the credit?
 
Dude, please, please, please! don't try to use MB Trading for options. They have no clue what they're doing.

I had an account open with them a year ago... the only options trading that they allowed was covered call & outright call/put buying.

I'm not certain how premium on covered calls would work... it would definitely correlate with how you own the stock and how/if you're using margin... after that their margin calculations are the issue.

Do yourself a favor and move to ThinkOrSwim or InteractiveBrokers to obtain proper option handling.
 
I haven't talked to brokers about it, but just thinking about it logically: if you hold 100 shares of one stock that's trading at $45, and you write a covered $30 call on it for, say, $17, your equity has not really increased by $1700. It's arguably increased by $200, and even that can disappear if the IV of the option goes up.
 
loufah, you are correct in terms of net-equity, but I don't want my broker netting out the position for me. I want the full $1700 premium from your example which I would then use to purchase further shares, options, etc. If I was simply trading IV on this call, your example would be more appropriate (although still unfair because I would not be earning interest on my full premium).
 
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