Reg T Calculation for Complex Portfolio

Discussion in 'Options' started by jr07, Mar 4, 2011.

  1. jr07



    I need to calculate for testing purposes the margin requirement for a potential complex portfolio made up of naked options selling.

    First question is there a software or webpage that you can upload a series of positions and it can do this calculation for you?

    I am trying to model this myself in excel, but I got lost trying to build the formula for a single cell. From what I understand the simple calculation is 20% of underlying value - out of the money + market value of the options? What if you have different options sold at different strike prices? What if you have both calls and puts sold for a specific strike price?

    Finally and fundamentally, I don't understand why an out of the money amount should be substracted to a margin requirement. If your position is out of the money shouldn't the requirement increase? Since the position is now riskier? Or is this offset by adding the market value of the premium, which had embedded the higher prices of the out of the moneyness?


    For instance, let's say you have sold

    40 Puts NVDA SP 21 @ 1.02$ - currently 1.07$
    20 Puts NVDA SP 22.5 @ 1.35$ - currently 2.09$
    10 Puts NVDA SP 24 @ 1.44$ - currently 3.35$
    10 Calls NVDA SP 22.5 @ 0.62$ - currently 0.37$

    NVDA closed at 20.77$ today.

    What is the Reg T margin requirement of NVDA?

  2. stoic


    1) As to your first question, I don't know of a Webpage to upload a series of positions to make the calculations, I do know a software that I use that will make the calculation on each. But that's only a small part of the application and it's not free.

    2) I would know how to build it in Excel, but if you wanted it to auto calculate for a whole series it would be much more than I want to detail here, but it would not be all that hard. I could do it in about 30 min.

    3) The Margin requirements are a little more then what you stated. The Option Margin Manual can be downloaded (PDF) at the CBOE website. The rules are (standard equities) the greater of two values: 100% of the option value + 20% of the underlying value less the out of the money amount. OR 100% of the option value + 10% of the underlying value. ( 10% of the strike price for puts). Most brokers also have their own minimum of 100% of the option value + $250.00 per contract. So in most cases it's the greater of the three.

    4) If you have options at different strikes then just figure the requirement for each. If you have a position with both naked Calls & naked Puts on the same underlying, same expiration, the requirement is whichever calculates to the greater amount, the call requirement, or the put requirement, not both.

    5) The out-of-the-money amount is subtracted because they are OUT-of the-money. The position has less risk. If the underlying remains unchanged, the option will expire worthless, this is a benefit to the short seller.

    6) Reg T on NVDA (the stock) is 50%. But one should ask, is the driver on the account SMA or Maintenance Excess?

    40 Puts NVDA SP 21 - currently 1.07$ Req.= $20,896.00
    20 Puts NVDA SP 22.5 - currently 2.09$ Req. = $12, 488.00
    10 Puts NVDA SP 24 - currently 3.35$ Req. = $7,504.00
    10 Calls NVDA SP 22 .5 - currently 0.37$ Req. = $2,870.00*
    *100% of the option = $370.00 + $250 per contract.
  3. johnnyc


    this doesn't sound exactly like what you're looking for, but still a good tool

    This should be a short strangle with the requirement being the naked requirement on the puts + market price on the calls:

    10 Puts NVDA SP 24 @ 1.44$ - currently 3.35$
    10 Calls NVDA SP 22.5 @ 0.62$ - currently 0.37$
  4. jr07


    stoic, thanks. Very helpful. What is the name of the software you use for the calculations?

  5. jr07


    thanks this is great

  6. jr07


    I am confused on the part of the calculation which is Option Value - Option Proceeds.

    According to calculations above, what should be taken into account is the market value of the option, i.e. the number of contracts times the market value for margin requirement purposes.
    However, the CBOE page states "margin proceeds" in their formula, which is the price at which you SOLD the options.
    Which should be used for margin requirement? Price sold or market price?

  7. johnnyc


    you would use the market price to determine your requirement. The proceeds only reduce your initial (Reg T) requirement when you place the trade because you can put those proceeds towards meeting the maintenance requirement.
  8. jr07


    On this point, if I have both naked puts and calls of the same strike price, it makes sense to calculate the requirement of both and use whichever is greater

    But if you have multiple positions at different strike prices? According to the CBOE page, you can use the same rule as above for positions at different strike prices, for instance if you sold Calls of SP 25 and Puts of SP 26. The requirement would be the greater of the two

    But if you have sold Puts and Calls of 25 SP, plus Calls of 26 plus puts of 27 plus Calls and Puts of 28, etc.
    Do you calculate the requirement of ALL the Calls and compare to the requirement of ALL the puts and use the greater?
    Or do you run individual calculations for each SP and then add all the final requirements?

  9. jr07


    Let me use a numeric example

    Lets say you have sold Calls and Puts of SP 26, Puts of 27 and Calls of 25

    The individual requirement are

    Calls 26 = $20,000
    Puts 26 = $10,000
    Puts 25 = $20,000
    Puts 27 = $20,000

    So the total requirement from Puts is $50,000 and the total requirement of Calls is $20,000. So if the calculations are based on the overall positions, the requirement would be $50,000 (the greater)

    But if you analyze 26SP on its own, you would use $20,000 as the requirement (from the calls, the greater). Continuing SP by SP, you have $40,000 requirement from SP 25 and 27. So is the total requirement 60,000$??

  10. stoic


    Current Market price.
    #10     Mar 5, 2011