Does anyone *really* understand margin?

Discussion in 'Options' started by gurenkena, Nov 20, 2005.

  1. gurenkena


    I haven't been in the market in roughly 5 years (remember what happened 5 years ago? yeah, that's why) At the time, I used IB strickly for writing puts and calls. Looking back, I think I understood their margin requirements for naked puts and calls but now, looking at their website, I can't figure it out:

    100% * option market value + maximum (((20% * underlying market value) - out of the money amount), 10% * underlying market value, $2.50 * multiplier * number of contracts). 20% above is 15% for broad based index options. Short sale proceeds are applied to cash. Not allowed for IRA accounts.

    As an example, VPHM is at $17.40. If I want to write the Dec05 $20 call at $.65, how much margin do I need?

    Honestly, I thought it was a lot easier to figure out 5 years ago... :confused:

    Thanks for any help!

  2. hajimow


    [0.65 + Maximum of ([0.2 x 17.4 -20] , 1.74, 2.5) ]x100 for a contract.

    The result will be : [0.65 + max (0.98, 1.74, 2.5)x100
    Since you actually get 65 from selling the option, only 250 per contract from your money will be locked as long as you keep that position. Of course based on the market condition those numbers in the maximum bracket might change and also if the preminum is reduced from 0.65, you will need less money and if that increases, you will need the difference as margin increase to keep your position.
  3. gurenkena


    Thanks hajimow. I had to read that 3 times before it sunk in! I thought in the past that margin was simply 20% of the underlying... maybe I knew less than I thought.

    Anyone know of a decent online or downloadable calculator that would let you enter in the stock price and option price and tell you the margin?

  4. Peppy


    still a little confuse on how you obtain 0.98.

    thank you
  5. There is a function in TWS that tells you the margin requirement of anything you're about to sell or buy. Just hit an ask or bid (without transmitting) and pull up the right click menu.
  6. vedanta


    Is this only initial margin? How to calculate maintenance margin, in the above example?
  7. ktm


    Maintenance is 80% of initial.
  8. hajimow


    still a little confuse on how you obtain 0.98.

    20% of 17.4 -(20-17.4)

    20-17.4 is the differece of the current stock price minus the strike price which is 20

    20% of 17.4 =3.48

    So it was my mistake . It is 0.88 and not 0.98.
  9. hajimow


    Based on IB's website Maintenance margin for naked CALL and PUT is same as initial.
  10. in your example--- the margin will be a minimum of 10% of the underlying
    #10     Nov 21, 2005