Covered Calls and Margin

Discussion in 'Risk Management' started by working_hard, Jan 12, 2009.

  1. Let's say you have a margin account over 25K, but not by much. It's a PDT account. You buy some stock and sell covered calls against it. If the stock then falls enough so that your total account value is less than 25K, do you trigger a margin call which forces you to close out the covered call?

    I'm wondering since you need a margin account to short, so if you fall below 25K will the brokerage revert you to a cash account and thus force you to close out that short call?
  2. piezoe


    As long as you retain the stock to cover your short calls you should be OK. That's why they are called "covered calls". The calls will expire worthless if the stock is below the strike price at expiry and you will bank the premium, but be down by the difference between the price paid for the stock minus the difference between the premium collected and the trading price at expiry. As long as the stock price is below the strike price you will not be assigned. Best to check with your broker in case they have some screwy rule re liquidation value and margin status.