Short Stock and Hedge with Calls!

Discussion in 'Trading' started by bvam1, Nov 16, 2002.

  1. bvam1


    I have a couple questions base on the following scenario. I'd appreciate it if you can spare a few minutes to help me out. Thanks!

    QQQ trading at $30.
    If I have a buying power of $10,000 to begin with, and I buy 20 call options contracts with strike 25.00 for $500/contract (5 X 100 = 500) for a total cost of $10,000.

    1) Am I allow to short 2000 shares of the QQQ? (because I have 20 calls contracts as my hedge)

    2) What kind of margin requirement am I subject to?

    3) What is my buying power now? Is it still $10k?
  2. Your buying power would be at $0.00, because options are purchased cash-only, they have no margin value.

    You would also not get the strike price 25 for $5. More likely the 27 1/2 or the 30 strike price would cost $5.

    Even so, if the QQQ goes up to $35, your $10,000 could be worth $15,000 - $20,000.

    Depends how quickly it goes up
  3. And then again it could go down ...
  4. I didn't want him to be totally discouraged.
  5. Initially, wouldn't this require Buying Power of $60,000?
    $30 x 2000 shares = $60,000
    Also, as previous posters have pointed out, all of your Buying Power would be used up by buying the Calls (which again, would not be priced at $5). Your margin requirement (#2) for the combined position could be increased by your broker which would affect #3 as well. If you insist on making the rather simplistic assumption that the QQQ 25 Call is priced at 5, then, why not also just assume the QQQ 35 Put is priced at 5, as well? Furthermore, why not just assume away taxes and commissions altogether? Didn't you post here several months ago claiming to have some foolproof money making options strategy?
  6. bvam1


    I think you guys misunderstand my questions. I should have made it clearer!

    Yes, I understand that stock options are non-marginable, but my question is after I bought the 20 call contracts with cash, would I be allow to short 2000 shares of the QQQ having those contracts as a hedge?

    Also, when i asked about my buying power after purchasing the calls, I was wondering if the call strike is at 25 and I shorted the stock at 30, should the difference of $5 be compensated to my buying power?

    And when I said that the 25 strike call cost $5, it was a hyperthetical example; then again, or it was? :)

    As for Hardrock375's comments, I don't really like your tone mister? I wasn't going to say much, but I changed my mind. My so called "simplistic assumption", as you put it, was not an assumption, okie? The QQQ 25 call CAN be purchased for 5.
  7. trdrmac



    I don't think with 10K in cash you would be able to short more than 500 Qs at 30. No way they would lend you 60k against 10K in equity.

    Second thing, buying 20 contracts is being a PIGGY with a 10 K account. Why not buy one contract and short 100 qs to test your theories?

  8. wb5983


    puts against a short position with no further margin req. What you would have would be a synthetic call, might as well just sell the call naked!
  9. The call with strike of 25 can be purchased for $5. But to buy it for $5 when the QQQ is priced at $30, it would have to be the day of expiration.

    Non-marginable means brokers are not going to lend you money for other transactions based on the price of the option. Any money you spend buying options is as if you have withdrawn it from your account, until you sell those options and have that cash back in your account again.
  10. bvam1,
    Are you asking me or telling me? Sure, the QQQ 25 Call CAN be bought for 5 (about), only problem is, the stock is @ 26.44, and not 30, as you presuppose in your example. Furthermore, the best inside market as of market close on Friday, on the Jan 04 QQQ 25 Call, was 5.10 bid at 5.30 on all five exchanges. That is the closest to a $5 premium on the QQQ 25 Call that I could find. Have you anymore "simplistic assumptions"? Like the above poster said, probably the only way you will get the QQQ 25 Call for 5 is on expiration day, trading at parity, with the stock at 30. As I said, Jan 04 is not currently the front month, at least not according to my reading of the lunar calendar.
    #10     Nov 17, 2002