Newbie q: where to invest collateral when writing credit spreads?

Discussion in 'Options' started by ChanTrader, Feb 27, 2008.

  1. When writing credit spreads your broker will require you to have a certain amount of equity as a maintenance requirement when you go on margin. Several members on this board have talked about investing that collateral somewhere to improve returns.

    I was wondering if there was a better option than what I'm doing: having it parked in my broker's (Ameritrade) money market sweep option. That's a piddling 2.84%. Surely there must be a better way. I was thinking of just parking it in an ETF like DIA but that is too risky. It must be more conservative so that in case one of my credit spreads goes awry and I have to liquidate to meet my obligations, I am not at risk for selling at a loss.

    Basically I am looking to (conservatively) juice up my returns when writing credit spreads and hopefully this board will have good advice!
  2. Interest rates are low now. You won't find a completely safe way to make a big return.

    You especially won't find a way to "juice up returns" while still being able to recoup all your capital in an emergency.

    Since you're investing in spreads you're obviously screening or at least looking at equities. Buy whatever ones you think are a good investment and hold on to them. If you're worried about having to come up with cash in an emergency, trade more debit spreads and fewer credit spreads.
  3. Take a look at VVR
  4. commiebat, i am a bit confused. At optionsxpress anything not cash cant be used as margin i dont think. Here's an example,

    1) I have $10000 worth of stock, try to write an option, says i dont have enough cash(margin) to do this.

    2)I have $10000 cash, try to write an option, says i have enough cash (margin) to do this.

    Same goes for maintenance, after writing the option, it wont allow me to buy $10000 of stock, says not enough cash to cover the existing open short option

    Is this something specific to optionsxpress or? I am also having a difficult time to figure out where to put this cash while still maintaining the margin. Currently it's just sitting at the account earning 0%, so anything is better...
  5. Hedge22


    It is different for every broker.
  6. Wait, IS ChanTrader saying that she can invest spare invested funds in a money market fund earning 2.84% while still supporting option requirements with Ameritrade? That sounds unbeliveably sweet! (i.e. that doesn't sound right as I doubt Ameritrade sweeps invested funds)
  7. Stay away from VVR, unless you understand the risks. VVR is a floating rate junk fund that has gone from 9.09 down to 5.77 in the past year.
  8. Every broker will be different, but most should lend you something on other holdings - just not as much as they would on cash. The closer it is to cash, the more likely they are to lend a higher percentage against it.

    Your broker might lend 50% on equities, for example, which means that $20k of equity would maintain as large a margined position as $10k of cash. They might lend you a higher percentage on money market instruments or government paper, for example, because they're safer.

    Check with your broker. And make sure you're using a margin account, not a cash account. In a cash account, I believe every position has to be fully paid.