First off, great site - been lurking for a while. I have a question please and hope it is easy to answer. If I shorted 500 contracts of YHOO May 14 put at $1 that would be an purchase of $50,000. I get that. I understand the CBOE has margin requirements for options etc - but realistically if you trade with a firm like Etrade for example.... How much cash would you need to have in your account to make this naked put trade? If you had only $55,000 for example in your account could you make the trade. Thanks!
no you don't get it, 1 contract is 100 shares underlying, so your risk is way bigger if you sell a put. You don't have the money by far (extremely). CBOE is only the minimum requirement, so Etrade will be most likely more.
500 contracts = 50,000 shares which you may end up owning at 14 = $700,000. Unless some of what you stated in your post were typos, please don't trade options.
my post was based on this article: http://www.schaefferresearch.com/co...+ahead+of+earnings/observations.aspx?id=92525 The article left out how much margin the individual would need in his account to make such a trade. That is why I posted here. So you'd need to have 700,000??
Don't worry about the article. If you wrote 500 contracts, you would need $350,000 at least in cash to cover those shares if they are put to you. Assuming Yahoo is 50% marginable with your broker dealer and assuming the price does not fall even more, then you would need more cash. And as another poster mentioned, due to the volatile environment we are presently faced with, most broker dealers have raised and are gonna want allot more equity for naked put writing. Take Bank Of America for instance, if you want to write puts on those, many broker dealers have a 90% underlying requirement. Trust me writing puts is not as easy as it seems on text or in a book. And many times, the unthinkable will happen to you. Remember leverage is a two way sword.
thanks itembonds, so not many brokers let you do naked puts for low margin on the underlying I am sensing. For some reason the figure 20% was in my head...thanks again "Trust me writing puts is not as easy as it seems on text or in a book. And many times, the unthinkable will happen to you. Remember leverage is a two way sword." So simply submitting a "sell to open" trade on a put with your broker ~ offering at the bid ~ would not initiate "writing that put"?
I think it is 50,000 * $14 = $700,000 like it was said before, unless u can margin some of it which your broker might allow. Again don't trade options, we've warned you lol.
Your max risk on put selling is almost the same as your max risk on buying the stock. Theoretically any stock's price can go to 0. If you buy a stock at $100 and the price goes to 0, you lose $100. If you sell a 100 strike put when the stock is $100 for $1, your max risk is $99 ($100 - $1) if the stock goes to 0. If you were in a non-margin account like an IRA, the margin requirements would be just like I described.
20% has always been "the number." But I doubt that holds true now in this environment. Right if you enter an order to STO for a put at the current bid price, you would get hit and be writing or short the put.
20% was a rough estimate. There is a formula for it. It changes with the stock price. margin requirement is not the same as your risk. Don't write naked options if you don't understand the risk.