I have some comments, which I will post in form of questions to stimulate thinking. The first comment relates to cash secured puts. If vol goes up (even if market does not move), then the short put would require more than the cash for the given strike. Therefore, selling a put is never cash secured between the beginning of the trade and its end, even if it is secured at the end. How do you deal with this problem (assuming you agree and understand my question)? In a brokerage account, your broker can close your short put if for instance underlying does not move, and vol goes to a large number. The majority of the people may not understand the point above. Short the put is also short volatility. If you have closed out by your brokers, it may happend when bid ask spreads are wide (very wide). A suggestion I have is to never sell the put, but rather implement it as a covered call. In such case the problem described above does not arise. If you chose the latter option, then what would you do if underlying reached the strike?
Mark: I am not sure you correctly understand what I wrote,or that I am correctly understanding what you wrote, or that at least one of us is wrong although I think that what I wrote is correct and the core of what your wrote is not correct. Some points to clarify: 1. Selling the put or making a covered call (covered with stock) is the same thing (with some exception that we can skip for the moment) if held till the end. So why are you saying that I am wrong in my what I wrote? It is basic put call parity. 2. To highlight my point on margin, let me give an example (a hypothetical one, but which will explain my point). Suppose that when one sells a put, the vol is very low, so the put price is close to zero. Let us assume ATM. Margin requirement at opening is 20% of price, plus proceeds from put (small). Let us now assume that vol goes to the moon. Put price becomes equal to price of stock. Margin requirement are now 20% of stock plus differential in price of put which is in total 120% of the ATM strike if stock does not move and vol goes to "infinity" Conclusion: margin requirment of put can be higher than strike price/stock price (because ATM). Therefore it is technically not cash secured in the sense that between the beginning and the end, one needs more than for margin than what is needed to buy the stock at the end (it is 20% more). Do you now see my point a bit better?
RiskFree, Personally I consider a "Cash-secured" put to mean that no margin is used. In your example, you mention 20%. I consider - if an account has $2000 in it, you could sell one put with a 20 strike to be cash secured - that's it. If you sell more then one, or you sell a higher strike put, you are now using margin and are not cash secured. My brother has an account that is not a margin account and he can sell puts (some people seem to think you can't do this, but you can). If he sells a 10 strike put, his spending power goes down by $1000 minus the premium. So, since the posibility of the stock going to 0 is already taken into account, then IV has no bearing whatsoever on being allowed to trade this - no matter what IV does, a 10 strike put won't go over $1000. JJacksET4
Your understanding and your example is a main reason why I am warning people. The broker using standard margin calculation would close your brothers's position because if vol rises, margin needed will be more than 2000, even if at the end what will be needed from your brothers money is actually 2000 minus the put premium. That is why your brother should implement it as a covered call (sell call at the same strike as where to sell put). I would suggest to your brother to ask for assurance in writing for the eventuality I described. It is not what you consider as cash secured, but what formula computers use to run the business.
Woah! How can a 20 strike put be worth more then $2000? Other then maybe by a $10 spread or something, it's not going to happen! IV can go to 1000 and it won't happen. JJacksET4
It is not the worth of the put that is the problem, but the margin computed by the formula which is the problem. Use the formula for ATM puts, and run it with two values of vol: zero and a large number. You might understand what I mean.
Well, I'm not going to argue anymore, but understand - there is no margin here - my brother doesn't have a margin account. There is no formula - the formula you see is for margin accounts. They cannot force a non-margin account to use margin. They (the broker) know a 20 put can never be worth more then $2000 and therefore, holding that cash in the account is enough. They cannot force money to be added to a non-margin account. Let me just say this - On a non-margin account, they cannot and will not require more money be added for a put sale that was done. JJacksET4