Selling covered calls - Margin required for no reason

Discussion in 'Options' started by CashProfits, Jul 25, 2009.

  1. I am not aware if this type of issue below applies to all brokers who offer Options but if so I'de love to know.

    I Established an account with Options House and when attempting to sell a COVERED call it tells me that I cannot do so without a margin account. Firstly I did not need margin for the amount of equity that was needed to establish the trade.

    The trade was as follows...

    The stock price I was attempting to sell a covered call on was at roughly $7.60

    I wanted to SELL two calls at a $10 strike for $0.30 and then BUY two calls at $11 for $0.10

    This trade above presents a max loss of $400 with a max gain of $40.

    So my main question is why does a trade requiring an equity of roughly $1500 with a max loss of $400 on an account with a cash value of $5000 require margin to make a short covered call trade?

    I am sure there is a "rule" as to why this is not possible so if someone could provide info on that I'de appreacite it.

    I guess it's back to only trading Forex where I'm free to use any strategy I want without bogus requirements that have no backing as to why they stand in the first place.
  2. Technically what you are trying to do is called a short call spread. I do not know the rules for option house but I can tell you about the broker I use:

    It has nothing to do with having a 5000$ margin. Normally the 5000 is the minimum amount to open a margin account. Like I said I do not know about option house but with my broker you can only do option spreads with a margin account (regardless of the maximum loss on any particular position). Basically in the strict definition of trading, what you want to do is NOT a covered call and is considered an option strategy.

    The logic behind it is sketchy for me but I think it has to do with the fact that with a margin account they will check you credit score and also they normally require that you be an "experienced" trader...

    Anyway usually brokers have the same general rules about risk I would say so in order to do what you want to do you will need a margin account, I don't think you can weasel your way around it. Besides, why would you not prefer having a margin account (even if you don't use the margin) simply because it allows you more trading freedom...
  3. It's not a short covered call trade. It's selling two bearish call spreads. It has a margin requirement and therefore it can't be don't in a cash account. You P&L numbers are 40/160 not 40/400
  4. The short answer is that the only thing that you can do with options in a cash account is buy them long or sell covered calls. Anything else requires a margin account.
  5. erol


    or if you're in Canada, covered calls requires a margin account as well.
  6. No they don't, you are allowed to do them in RRSP's...
  7. erol


    oh really?

    I stand corrected....

    When I inquired about Covered calls to TD Waterhouse in 2007, they told me i needed a margin account. Maybe they changed their rules.
  8. donnap


    Yes, the spread requires margin. If you were "legging in " in the order you described, initially the margin for the 2 naked calls would be greater than the spread margin.

    A similar debit spread should not require margin.
  9. erol


  10. Strange, but I am sure they must authorize it in an RRSP... I know for certain that my broker does - I should know I used to be an options broker for them.
    #10     Jul 25, 2009