Best thing to do with cash after selling premium?

Discussion in 'Options' started by blkcrk103, Sep 13, 2012.

  1. I was curious if any of you have any good ideas on the best way to use the extra cash in your account after selling premium?

    Do you just leave it in the sweep account or do you park it in something else until you need it? Do you use this to neutralize the deltas in your short position as much as possible?

    Thanks in advance
     
  2. I suggest using it to sell an additional contract.
    For example, if you need $2,000 to sell a contract, but only have $1,600 in your account, but the premium is going to bring in $400,... you can use that anticipated credit to sell another contract without being on margin.
     
  3. I wasn't aware that you could even use that credit until the position was closed.
     
  4. personally, i have not tested this out to see if you can or cannot.

    i see that it appears in my account immediately once the premium is sold, however. but perhaps you are right in that it is withheld from the broker until expiration or until the position is closed.
     
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  6. no you can't. if you have 2000 in cash and sell premium for 400. They freeze the 400 and some part of the cash (in the form of purchasing power). All you can do is earn interest on the cash.
     
  7. until the short option position expires or is closed, that cash is not available for any purpose, whether it be buying stock or selling/buying options or withdrawing cash.
     
  8. I have been using the credit for over 20 years at Schwab.
    Both for selling puts and for doing buy/writes.
    However, it is possible that if you have a cash secured account only, such as an IRA type account, that the computer may not let you.
    If so, call your broker to place the order for you, so they can over ride the computer, and thus use the credit to sell another contract.
    For example, if you only have enough cash for 1.75 contracts, and the credit is enough to let you sell 2 contracts, you can absolutely use it.
    I find it difficult to believe only Schwab lets you.

    Again, it is possible the computer wont allow it, but your broker can over ride the computer. Just make sure to tell him to charge you the web rate and not the assit rate. Since it is the computer that is forcing you to use him.
    It all depends on what type account you have.
    Ask your broker.
     
  9. Take the case of selling 1 ATM MSFT put for $2 (strike 30 for simplicity)

    Cash account (IRA, non-margin): each put will require $30 worth of cash that will be tied up in the put. The cash will remain in your account but you have no purchasing power

    Margin Account: each put will require the $2 premium + 20% of the notional ($6). So if you have 30 in your account, then you have a purchasing power of $24. You could sell 4 more puts in MSFT as each put would require $8 worth of margin and you would have $32 worth of equity. But you see that the premium you receive doesn't go towards anything.

    Now suppose you do that and time passes and the puts are now worth $1 and still ATM. Then your required margin would be $6 + $1 for each put. So you would need to post $35 worth of margin and you would have $5 of cash you could withdraw.
     
  10. you're BSing. If an option has a $2000 margin requirement and your account has $1600, you can't sell the option. Period. no broker wll let you do that.

    if your account has $2001, you can sell the option but the $400 premium is not available to write additional options. That's because your account still has a value of $2001: you would have $2401 in cash but the value of the option is ($400) because it's sold short.

    i find it incredible that you've ever written an option before if you don't know something as basic as this.
     
    #10     Sep 13, 2012