Writing US options on a Canadian listed stock

Discussion in 'Options' started by svg, Jul 9, 2009.

  1. svg


    I want to write covered calls on a stock that is listed on both the TSX and NYSE. I would write the US listed calls (tighter spreads and better value) but buy the stock on the TSX because my account is with IB, my cash is in CAD, and I would pay margin interest if I purchased it on the NYSE/US side.

    Question: If the calls get exercised, exactly what happens? Would the TSX purchased stock be sold (removed from my account) as usual and the USD proceeds credited in the USD side? Or would I have to buy it on the US side (which would seem an odd thing to have to do since the common stock is the same regardless of which exchange it's traded on).

    I'm accustomed to writing puts and call (naked and covered) on both US stocks and Canadian stocks (options traded on the montreal exchange), but I've never done it the way above.

  2. In practice if you were assigned you would end up long stock on the TSX and short stock of the US side. Legally it poses no problem, but you need to check with IB customer support to check how they handle/settle a case like this. I know that for the online broker I used to work for, they would have balanced the position automatically to even it out without any actions on the client's part... but then again it may be different with IB, maybe they would leave you in that position assuming you are trying to do some arbitrage or benefit from exchange rates. Again the guys you need to ask is IB's customer support...
  3. MTE


    You should check with your broker. However, generally, as far as I know, this doesn't work.
  4. You can't deliver the NYSE stock on the TSE assignment. You will incur a short TSE position if the call is assigned, so your risk is microstructure between inter-exchange offsets. Not a big deal, but the broker may not offer a margin improvement for the CC over the short naked call.
  5. Make sure you understand that you are not edged for the currency exchange. A stryke at 40 is 40 on the US priced stock, the ratio of one stock to the other fluctuate over time with the exchange rate (ie ABX:ABX.TO). So you may get exercised in the US when your price is not hit in Toronto.
    May not be an issue since you are trying to collect the premium but I had some "surprises" a couple years ago on some longer time spreads. The trade was an "arb" long a high dividend oil trust, short call and long put. I had the "bright" idea to hedge with the US options at a time when the USD/CAD move from 1.4 to 1 or something. Against me anyways.
    Theses trades dont work anymore since the dividends are not there or the market became efficient. It could yield about 8%. It was funny when I saw that a trader in Milionaire Traders was doing the same.
  6. Not with every broker... The way to do it is:

    1) You buy the stock in your CAD account on the TSE.

    2) You sell the covered call in your USD account on the NYSE.

    3) Once settled, you have the short call position transfered from the USD to the CAD account.

    In a case like this, if you get assigned, the stock will automatically be sold on the NYSE but in the CAD account, which implies a currency conversion.

    Of course your broker will only accept this if the stock is inter-listed (they are 100% equivalent). EX: RY is fine, JDS would not

  7. svg


    Thanks for the replies.

    I do understand the implications of the trade. Because the options contract would be US for the US-based stock, of course the buyer of the call would be purchasing the stock via the NYSE. I just wasn't sure if it's standard practice for the broker to automatically offset the short US stock position with the long on the CAD side. I will contact IB and see how they do it. They are a bit tough to get in touch with, which is why I asked here first.

    I suppose it would be safer to close out the position on the Friday before expiration if the SP is close to or below the strike. Yes, I know I could possibly get assigned prior to expiration, but it is pretty unlikely, and I would still be able to manually "swap" the stock that day. My main concern was getting assigned and then having a gap in the stock or forex go against me on the following Monday.

    BTW, the reason I want to do it this way is because:

    a) Canadian dividends are tax-preferred, i.e. taxed at a lower rate than interest income and at a similar rate to capital gains. I'm sitting in a lot of cash on the CAD side, so I want to go long a few tax-preferred dividend paying companies on the Canadian side while collecting premium to somewhat protect my downside and hopefully increase overall return while I'm holding.

    b) Montreal Exchange options are lousy. The spreads are so wide and the volume so thin that unless you are going to hold till expiration they are a very bad proposition. Great for the MMs - bad for us.

  8. You are 100% correct on that, these guys are absolute crooks... Its the reverse sausage effect:

    the less the spreads are attractive, the less volume there is, the less volume there is, the spread keeps getting worse and so forth...

    I'm happy to be Canadian, but damn apparently we can't trade options for sh*t lol
  9. erol



    this is still really surprising to me
  10. svg


    Well, I ended up doing covered writes on BOTH exchanges. As an earlier poster pointed out, the currency could have ended up being a problem, so I decided it wasn't worth the risk. Got a decent fill on M-X.

    The problem with m-x isn't so much the entry price - you can usually shave a bit off the b/a and slowly but surely get filled. But if you needed to quickly close out a position prior to expiration, that's when you would be in a real bind. After a few costly lessons years ago, my rule with m-x options became that I only put on a position if I am going to hold until expiration. No trading.

    BTW, sometimes you can lock in a profit with mispriced options on the m-x. The MM's are sometimes asleep. lmao. Last year I was able to lock in a position where my worst case was a wash and my best case was a tidy little profit (w/ currency hedged). The MM figured out what I was doing and shut it down. But you can get small mispriced fills now and then. For some odd reason, the MMs don't always update their b/a's as quickly as they should.
    #10     Jul 11, 2009