options margin ques

Discussion in 'Options' started by omer486, Jul 28, 2012.

  1. omer486

    omer486

    Lets you have $20,000 in your account and you buy $20,000 of a stock with 50% margin requirement. Now you have put up 100 % margin.

    Then you sell options in some other stock for a credit of $600 and a margin requirement of $8000. Now does your margin in the stock position fall below 100% and will you start being charged interest on that position?
     
  2. First, I'm going to assume this is a purely theoretical question, and assume you are not stupid enough to put yourself on that kind of margin (50%), in the type of volatile market we are in.
    Let me also assume the nature of your question is about when you would start being charged margin interest, if you put more cash at risk on your investments, than you actually have cash to pay for.
    Let me also assume you may not be aware that it is NOT stocks dropping, that wipes out investors accounts during severe market downturns, whether it be over a period of days, weeks or months.
    It is being on excessive margin that wipes out most accounts.

    Having said all that, if your goal is to be on margin, but NOT pay margin interest, then selling otm naked puts is one way to do it.
    Sell puts on the stocks you are interested in, instead of buying the stocks itself.
    As long as not many of the puts are actually put to you, you can go on the % of margin you stated, and not be charged any fees.
    HOWEVER, just keep in mind even though you are not charged any margin fees, it is still the same as being on "regular" margin, and just as risky. But at least this way you get to pick your price, vs taking what the market offers you.

    I know I did not answer your specific question, but I'll let others take you down that excessive margin road, as I don't know what your level of experience is.
     
  3. Put Master told you a good way of trading which is wisely selly naked Call and Put. Off course he mentioned only PUT.
    Now back to your question. Your first trade on the stock, will use 50% margin and you will pay interest on that. The second trade you are selling option on a stock that you don't have and that will need cash to support that trade (for calculation of the amount of cash to support naked options, check with your broker)and then you will also need to pay interest on that part too. So the second trade will increase the interest that you need to pay.

    You had 20K, and when you trade that second option trade, you only have 12K and since you have bought 40K worth of stocks, you are borrowing 28K from your broker.
     
  4. <<< Put Master told you a good way of trading which is wisely selly naked Call and Put. Off course he mentioned only PUT. >>>

    I would never suggest anyone sell naked calls as a strategy.
    Waaaaay to risky.
    Much more risky than selling naked puts,.... which by itself is risky enough.
    The only time I ever sold a naked call, was when I was 99% sure a naked put was going to be put to me in a couple of days, when the contract expired, and thus anticipated owning the stock. Thus turning the naked call into a covered call.
    I did it because I liked what the call was paying at the time, and didn't want to risk losing that credit over the weekend, if the stock opened lower on monday.
    But selling naked calls as a strategy..... YIKES!
     
  5. TskTsk

    TskTsk

    Just do like the banks and lever yourself 60 times. It's the only way.
     
  6. You don't pay any margin in your example. You have 20k in cash. You buy 20k in stock. You are not using Margin yet but have the capacity to buy an additional 20k of stock. You sell your options which reduced your margin capacity by 8k but your still haven't borrowed any money. So you now can buy 12k of stock on margin (paying interest) if you want.
     
  7. Isn't it that he reduced his margin capacity by 7.4k and can now buy 12.6k? The credit for the puts sold is in the cash account and assumed earned?
     
  8. * may be some haircut as the option is not over this stock.
     
  9. I correct myself. My answer was on the assumption that you bought 40K worth of stocks in the first place. When you sell the options, you get $600 but you need that plus $8000 cash to maintain that position, so your cash will be $12K and you had already bought 20K worth of stocks, so you pay interest on that $8K that you have borrowed.
     
  10. If it were a buy write his purchasing power would still be 20k and he would be using no margin. If he were selling puts then it would be as if they were different underlings. This is for a reg t.
     
    #10     Jul 29, 2012