The PREMIUM is NOT THE STRIKE. THE PREMIUM IS THE COST OF THE OPTION. Allow me to cut and paste from Investopedia: What is the Maximum Loss Possible When Selling a Put? The maximum loss possible when selling or writing a put is equal to the strike price less the premium received. Here’s a simple example: Assume Company XYZ’s stock is trading at a price of $50, and you sell three-month puts with a strike price of $40 for a premium of $5. Let’s say you sold 10 put contracts, and since each put contract covers 100 shares, you collect $5,000 in option premium ($5 × 100 shares × 10 contracts). Just before the options expire, Company XYZ is reported to have engaged in massive fraud and is forced into bankruptcy, as a result of which the shares lose all value and trade near zero. The put buyer will exercise the option to “put” or sell the shares of Company XYZ at the strike price of $40, which means that you would be forced to buy these worthless shares at $40 each, for a total outlay of $40,000. However. since you had collected $5,000 in option premium up front, your net loss is $35,000 ($40,000 less $5,000).
Hey @vanzandt, you don't need to try to explain me options as I'm an expert in options. Your quoted text says exactly what I said since the beginning: "strike minus premium" is the max loss with a short put. And that's the case here. Why does the broker now ask for a 19 times higher collateral than one can lose maximally? That's the real question here! You seem not interested in resolving the case, but throwing smoke into it to make me look like an idiot. Thanks for your questionable "help"!
In the above example... the strike is $40. Right? You sell a $40 put that has a bid of $5. You collect $500 RIGHT? The stock goes to zero Q: How much does it cost you to buy the put back that you shorted? A: $4000 Q: How much did you lose? A: $3500 I don't mean any disrespect.. but you are NOT an options expert.
Don't bring-in many different examples! The said example with Strike=4, Premium=3.80 suffices to grasp this, like from this table:
Much less you, man! And: no need to buy back the fucking option. One usually let's expire it!... All the options guarantee is usually for the expiration, not closing before. I'm talking like with a 5 year old...
The calculation.. it IS strike minus premium. But here is what you are missing THAT IS IN ADDITION TO THEM ALREADY LOCKING UP THE PREMIUM YOU DUNCE. YOU SELL THE PUT---YOU GET A CREDIT. THE BROKER INSTANTLY FREEZES THAT. BUT THE BROKER IS STILL ON THE HOOK FOR THE STRIKE MINUS THE PREMIUM. IF YOU SELL A $5 PUT FOR $1 THEY LOCK UP $100 INSTANTLY THERE IS STILL $400 OF RISK THEY LOCK UP AN ADDITIONAL $400 from YOUR ACCOUNT AND HOW IS THAT $400 AMOUNT CALCULATED? THE STRIKE MINUS THE PREMIUM (THEY ARE ALREADY HOLDING) THIS NOT F'ING ROCKET SCIENCE. IF YOU SELL A PUT, EVERY BROKER IN THE WORLD REQUIRES YOU TO HAVE THE CASH EQUAL TO THE STRIKE MINUS THE PREMIUM. SELL A $10 STRIKE, THEY FREEZE $1000 -THE PREMIUM SELL A $200 STRIKE, THEY FREEZE $20,000-THE PREMIUM SELL A CMG $2000 STRIKE PUT.... THEY FREEZE $200,000-THE PREMIUM DO YOU REALLY THINK A BROKER WOULD TAKE A $200,000 RISK IN A $1000 ACCOUNT? I was trading options before you f'ing born You're stupid.