Options - how does this work?

Discussion in 'Options' started by drosengarden, Sep 10, 2008.

  1. So I have an account with Scottrade.

    Apparently I cannot do naked calls or naked puts with them.

    Either way - I purchased some stock and wanted to put my position in with a Short Call.

    I did just that - however - I'm wondering why the sale of the call took my Buying Power LOWER?

    I had $89,848 buying power (includes the margin)
    I purchased $43,366.12 in stock
    I sold the calls for $4,860 premium.

    When that was all said and done - my buying power is now only $30,076 (including margin.)

    I would imagine that I had $45,821.88 in buying power (including margin) after the purchase of the stock. So then when I sold calls - which BRINGS IN MONEY - why did my buying power drop to $30,076 - which is $15,745.88 LESS BUYING POWER than if I had not sold the calls and brought in that money.

    It doesn't make sense to me. I sell calls - bring in money - and then my buying power drops by more than 3x????

    Please help me understand if you will.

  2. tpli


    can you provide the price of the stock you purchased and the strike price of the calls, that would help in the calculation.

  3. Jun,

    Here they are (thanks in advance!)

    Purchased 2700 Shares @ $16.0589 (average price)
    Sold 27 Call Contracts @ $1.80

    Purchasing power (on a margin account) went from $89,848 to $30,076 (!!!!????)

  4. tpli


    hmmm.... the only way that I can think of in which you can lose buying power is if you sold in the money calls, meaning you sold calls that are under the stock price.

    If this is the case, then the buying power is used as margin to cover any potential losses.

    Do you know what is the strike price of the calls.

  5. There are no potential losses to the upside.

    Losses to the downside were reduced when the calls were sold.

    I believe this is just Scottrade being ignorant. They are a horrible broker for option traders.

  6. I was gonna say. Sounds like they don't know how to calculate the real risk on a covered call.

    Sounds like you need a new broker.
  7. rickf


    Scotttrade isn't being fair - sounds like they're treating your short calls as naked when in fact they are covered calls. Your calls are protected by the presence of the actual shares in your account. If all you did was short the calls (ie, a truly 'naked call') then you'd have to ante up margin to cover the risk on those if they went ITM and got called away. But in this case, based on what you said, I think you're covered and shouldn't be penalized with reduced buying power.

    I've heard ST is great for basic stock stuff, but if you are going into options, may I suggest you look at OXPS or ToS? They cater to options traders in addition to offering stocks and futures as well.

    IB is probably good as well, but I just haven't used them.
  8. Jun,

    Sorry about that - the Strike Price of the calls I sold are $16.00. So in fact the calls were ITM by a little under $0.06/share.

    From what I'm reading from other posts - the suggestion is that Scottrade is making me "ante up the margin" to cover the options in the event they get called away. I'm not sure why this is?

    But could somebody please help me understand the math so I can see exactly what is happening here?

    And many of you are right - Scottrade is not good for options. I cannot do any nakeds. I found another broker - seems REAL inexpensive - www.ChoiceTrade.com - whaddya'll think about them?

    Thanks for helping me with the math in advance.
  9. MTE


    Either call them up and ask them to adjust the margin manually, since it seems their system didn't pick up the position right, or, as others have suggested, find a broker that understands options.
  10. With such good option brokers as IB, Thinkorswim.com, Optionsxpress why look into a small newer firm with no history really. Look at the first three choices listed above for a good option brokers with good rates.
    #10     Sep 11, 2008