online discount brokers, part 1: why I had to start looking

On this latest spell of my life as a US resident, I started out with Bank of America's "self-directed trading" service -- nothing fancy, but usable, and I did love the 30 free stock trades per month (given that my account size met their threshold).

Alas -- this summer they automatically switched my account over to "Merrill Edge", the "Wealth Management Platform" (ha!) they got from their acquisition of Merrill Lynch.

Among many minor inconveniences, I found out I couldn't trade options any more -- had to apply all over again. I did, and found out I was only allowed to sell covered calls -- no options buying any more, no selling cash-secured puts any more (!).

Selling covered calls is my main use of options (since I'm a pretty conservative investor!), but I missed the ability for occasional buying of some puts or calls to temporarily hedge a position, and the somewhat more frequent use of cash-secured puts as an alternative to a buy limit order to perhaps purchase a stock if it goes down enough.

I nevertheless endured, kinda golden-chained by the free stock trades I guess (I'm a real penny-pincher!-), until Merrill mysteriously locked me out of my online accounts for weeks, on varying claims about "funds due" (when I had plenty of cash in the account!) or "sale-not-long" (whatever exactly they mean by that).

Phone customer service was almost invariably good (with the exception of one guy with a strong Brooklin accent who appeared to be looking for a fight, and even though he was totally clueless about what the problem was still kept trying to pin it on me), eventually excellent when we (me and my wife -- we trade usually together and by consensus) were finally escalated to a manager who gave us his direct phone number (saving us the incredibly long waits any normal call to customer support usually involves), online-rate trades ($4.95 for stocks -- he couldn't unfortunately gave us the free trades we would have gotten if actually online) rather than the ridiculous rate for human-assisted trades as long as the mysterious lock-out remained, and really bent over backwards to try to find out about the problem and fix it for us.

Alas, he couldn't -- though it eventually disappeared, as it happens, just after the settling date following the expiration date for some calls I had sold (a couple of which got exercised); so I suspect their bug may be related to the one that recorded me as selling the same covered calls twice at a few minutes' time difference (when I had stock enough to cover only one of the two sales -- and remember, I'm not allowed to sell uncovered calls, so, even had I tried -- which I obviously didn't, as I'm not crazy yet;-) -- their SW obviously should have blocked me!-).

That customer-service manager was incredibly good in his follow-through, even offering to waive the fees for account transfer to some other broker, if, given how we justifiably felt after that episode, we just wanted to get rid of Merrill altogether (which we definitely did!-).

So, I had to start looking around -- and I did, and I plan to post one or more follow-on "episodes", in the course of the next few days, about what transpired afterwards...

Options: investing or gambling?

Most people associate "options" with sheer gambling -- just read the rousing condemnation of them in Peter Lynch's generally excellent book "One Up on Wall Street", for example. Yet -- pause for a moment and think about it -- each option trade has two counterparts, a buyer and a seller... can they both be "gambling"?

Option trading is a zero sum game, after all (net of commissions -- and, on a deep-discount brokers today, those aren't too terrible): if one party is taking a likely small loss in the unlikely chance of scoring a large gain, doesn't it stand to reason that the other party must be accepting a likely small gain in the unlikely chance of giving up a large loss (or, more precisely, the unlikely chance of missing out on the possibility of a large gain)?

The way I like to look at it is: options (covered calls, specifically) are somewhat like lottery tickets. The buyer of a lottery ticket pays a small price and usually gets nothing in return, but once in a while "might" walk off with a jackpot; the seller of a lottery ticket has no chance of thereby making a fortune, but pockets with certainty the ticket's small price and, by repeatedly selling many tickets, makes a pretty steady income. Once in a while the ticket just sold will have been a winning one -- this is not "a large loss" to the seller, unless said seller incorrectly "frames" it mentally in that way;-), but it can be seen as having "missed out on the possibility of a large gain".

A lottery seller who was terrified of one day selling the jackpot-winning ticket and thereby hoarded all tickets himself, never selling any, would nullify the small but steady and certain income they might have realized by selling the tickets to the public. If anything, this is the "gambling" attitude -- never sell a ticket because it just "might" be the big winner -- really similar to buying tickets with a similar hope, after all.

And this, believe it or not, is what most conservative investors end up doing, without realizing it: by not selling covered call options on their stocks, they're unknowingly turning into gamblers!-)

OK, this is put somewhat paradoxically, mostly to whet your appetite for more discussion of options, but more and more writers are getting convinced of that and making a good job at explaining and evangelizing this strategy. I'll have much more to say about it, too, but, for now, you could start e.g. with this site, which seems to do quite a decent job getting you started, or many of the excellent books on the subject.

I recommend Ron Groenke's books and site (if you don't mind the idea of paying 150+ $/year for his Windows-only software) and Paul D. Kadavy's "Covered Call Writing" and "Put Option Writing" books (his software, actually just several simple and useful Excel spreadsheets, is free -- you just have to write to ask for a copy at the address given in the books -- but differently from Groenke's it doesn't get info such as stock prices and option premiums from the net, you have to look it up and enter it manually).

For better-explained theory (no sw though!-), Thomsett's "Options Trading for the Conservative Investor: Increasing Profits Without Increasing Your Risk" is, I think, still best. (Haven't read Wolfinger's "The Short Book on Options: A Conservative Strategy for the Buy and Hold Investor", but I believe it supports the same core ideas and strategy).