Let's say taht I operated a bull put spread on at example on AMZN. Lets say that amazon at the moment is at 106. Selling at the money one put (30 days long) at 106 and buying at a lower price one call at 105. What can happen if the price goes under 105? Do i get assigned? What does it mean? That I Need to buy 100 shares of the underlying? I'm asking all this because I'm not understanding how much margin do I need( if I need more because in the worst case i Need to buy at example 100 Shares of Amazon. Or i Just lose the difference in the two prices of the puts? Interactive Brokers talking about margin say this on his sites : Put Spread A long and short position of equal number of puts on the same underlying (and same multiplier) if the long position expires on or after the short position. Margin Initial/RegT End of Day Margin Maximum (Short Put Strike - Long Put Strike, 0) Maintenance Margin Same as Initial Cash or IRA Cash Same as Margin Account (Both options must be European style cash settled) Short Put Strike Price (American style options) IRA Margin Same as Margin Account I wanted to start on Interactive broker, and I have tested on demo accounts the Bull Put Spread and Bear Call Spread. Can someone explain to me, if I'm doing something wrong? How much capital do I need for starting this kind of operation at example on Amazon ? Thank you and sorry for the newbie question. I'm not interested in buying some courses or joining anything, so please be kind.
Google bull put spread. You have to learn basic definitions. What does it mean to be a seller of a put? What is my breakeven point? I am the buyer of a put What is my breakeven point? yes. now assume the price is 107. then do 110 at expiration. What is your profit or loss?
If I understand you correctly you are selling a 106 put and buying a 105 put at the same expiration. The margin would be 100 times the strike difference per contract ($100 per contract). That amount minus the initial credit you received is the maximum you can loose. You won't need to buy any shares unless AMZN ends up between $105 and $106 when the options expire. But you could always avoid the need of buying shares just by closing the put spread before it expires.
Thank you all for your responses. But if an Option is assigned what can happen is : 1 I have to add money to the account and own the 100 shares 2 add monet to the account, own 100 shares and immediately sell on the open market, hoping to not have a bigger loss. 3. I have also read that I can execute one long leg and just covering the difference with cash. But how do I do it exactly on Interactive Broker? What are the probabilities of being assigned? Thank you
I think I will be in profit of the Credit taken before right? (Being over with profit capped.) What I'm fearing and what I cannot testing is the assignment of an option and I don't know how to move about it and about executing the other leg to cover.
And if Amazon goes under 105? The option get assigned but because I havent tried in real I don't know how to move after. I have also read that I can execute one long leg and just covering the difference with cash. But how do I do it exactly on Interactive Broker? I know that I'm a bit confused. Thank you
The probability of assignment is generally low, but it increase as you approach expiration and the stock approach your short strike price. Normally, if there is time premium left, the option won't be exercised (possible exception is Ex-Dividend). If you get assigned and your long PUT has not expired, you can exercise the long PUT so you don't need to add additional capital. Your biggest risk is holding the position into expiration and at the last minute, the stock drops between your short strike and long strike (example below 106 but above 105). In this case, you get assigned the stock, but your broker will let your long PUT expire worthless; thus you are long the stock and must add capital to cover the long position or sell the stock.
In this case, I think IB will raise the margin requirement much higher since now you own 100 shares. You could deposit funds to the account to meet the new requirement, but I suspect that IB will simply trigger automatic sales of the shares if the account doesn't have enough liquidity. Exercising the long put takes an additional day, so if the shares are automatically sold you might not have the time to do it.
So do you think it's always better to have some capital deposited for having a cushion right when assigned ? And also to take profit of the position at like 80/90% before approaching expiration? Thank you again for your explanation swingtrader123. For at example operating with option Amzn how much do you think I need to deposit first?