I am new to all this... Say I sell a short dated put and do not mind owning the underlying at the strike price. An example is this TSLA put, where I am OK owning TSLA shares @ 1,505. Now say that this option expires unexercised (price never reached the strike) - am I right that my total P&L for this trade is ($9,498 minus $45,589*borrow rate)? If so, how can I find out how much of my equity is being "locked away" so I an use the calculation above to compute an actual return on equity? Thank you
Your total profit (assuming TSLA price never reaches 1505) is $9,498. Your margin is 50,147+45,589. But remember that the maintenance margin will change every day and will go up if TSLA falls. Your ROI will be based (roughly) on the above 2 figures. As a dirty figure, it's around 10% You didn't ask for this advice, but I cannot resist - pls don't do this unless you have $145K sitting in your account, and are genuinely happy to own TSLA at this price. Your short put is ATM right now, and TSLA can easily fall 200 points before you can say "What the hell was I thinking?"
Wouldn't it just be 9498/45589, for a return on margin of 20.8%? Money to maintain the position is (currently) $45,589. So that is how much is locked away. Edit: looks like ffs has a better answer. I don't short options anymore. And, as he says, please be damn careful!
I did say i was happy owning the underlying Your ROI calc is a bit confusing, where is the equity component? Margin only matters in terms of cost of funding, right?
That was my initial understanding but that is called Maintenance Margin. How much of that is borrow and how much is equity?
1. Yes. 2. I’d think your return would be the return on the amount you put at risk, which is ~$150k. Using “return on equity” looks a bit strange (at least to me) because one broker may reserve some equity / margin / buying power, while another broker may reserve different equity, so you’d end up with different “returns on equity” at different brokers. Though in your case it’s the margin (some brokers use Buying Power and decrease that), and it looks like it’s $45K. Sometimes this may change overnight, as it’s based on risk and the risk may change, for example as the stock price changes or the option nears expiration. For example if the stock went to zero then the broker wouldn’t let you trade on just the $45k margin when your position lost $150K. While your margin usage may decrease/improve if your position makes money and/or risk decreases.
The Equity locked away is 45k. However as that number changes and goes up as you lose money on the position it’s disingenuous to use it for your return calculation. I personally use the stock price in the case Of a naked put. The return is lower but it gives you a more honest picture of your embedded leverage
I use the underlying price to calculate risk/coverage/headroom/margin of safety. Let me ask my question differently: I sell a put waaaay out of the money. Say 90 per cent away from current stock proce. I would like to be able to compare the return on equity allocated to this options to dividends paid by prefs and junior debt across the capital structure.
Then you simply have to use your own calculations because they aren’t related to anything that your broker does or calculates, and frankly, unrelated to trading options. Can you imagine everyone calculating gazillion things in different ways and asking how to perform calculations on things that no one else measures?
Very true. But I am trying to figure out how much of my equity is being locked away and not available to use for other trades. Everyone should be interested in that no?