Suppose I have one short put that is OTM, and one short call that is ITM. I am trading ES futures options, and it is expiration Friday. Suppose I wish to simply cover the ITM call at the end of the trading day, rather than buy it back. The rationale behind covering is that the total commissions for the assignment and cover will be less than the commission for the buy-back plus the time value that the market makers add on. The disadvantage for covering is that I have to wait until Monday (the assignment occurs on Monday) to place the next trade--and time value is lost over the weekend. If I buy back both legs on Friday, I can enter a new straddle on Friday as well. How would you "close out" the straddle? Is there a margin requirement for the futures trade to cover? Margin requirements on expiration Friday may look like this: Initial Margin: $4500 (margin for the ITM call) plus $500.00 (value of the ITM call) equals $5000.00. Maintenance margin is about $4100.00. The put is basically worth zero, and the call basically only has intrinsic value. Will I need $4500.00 of account equity to place the cover? Common sense leads one to believe that there is no additional margin requirement, for the ITM call's margin is the same as the ES future; only the value of the option makes the difference. The put is not considered anyway, and the future is used to cover. Any thoughts appreciated.
HERE IS THE ANSWER: I DID COVER THE ITM CALL. MY INITIAL MARGIN WAS INCREASED BY ABOUT $2250 (WHICH HAPPENS TO BE EQUAL TO THE EXCHANGE INIT MARGIN REQUIREMENT DIVIDED BY TWO. THE MAINT MARGIN WAS INCREASED BY ABOUT $1800 (WHICH HAPPENS TO BE EQUAL TO THE EXCHANGE MAINT MARGIN REQUIREMENT DIVIDED BY TWO). SECOND, BECAUSE OF A LACK OF LIQUIDITY WITH DEEP ITM FOP'S, THE SPREADS ARE WIDE (AS OF 10:15 AM THE SPREAD IS 10 POINTS). SO, I WOULD COVER THE ITM FOP GOING INTO EXPIRATION FRIDAY (WITH SERIALS) AND INTO LTD THURSDAY (FOR QUARTERLIES).
Just a note: There is not "time value" today, when you cover the ITM option you are simply paying the spread which is the incentive the mm's have to make that market. Also, the theta of the straddle over the weekend should not be that significant. Perosnally a bigger issue is whether or not that implied volatility level in the straddle is a sale here, not the theta over the weekend. Volatility is getting pretty cheap compared to the last 3 months and IMHO its not really a screaming sale here.
jwcapital: How much were the puts? You could have bought an additional 2 puts (if they were available for 0.01, and you should have been done with your position (except for pin risk, you would flat). Underlying and long 2 puts is long straddle. You would then be left with 1 put, -1 call, and long 1, which is then a flat position. PS: I do not know if you know it or not, I think you should not use caps in your posts. It is viewed by others as shouting or being angry (which I assume is not what you mean).