Will this naive option strategy work in practice?

Discussion in 'Options' started by Longcat1982, Jul 30, 2009.

  1. Suppose you start with a brokerage account with some cash.

    1) Sell a bunch naked put options and hope they all expire out of the money.

    2) When you're faced with a margin call, sell more naked puts until your account value is at $0 or higher

    Go to #1

    The basic premise is that when your account balance drops below 0, you sell additional naked puts to bring the balance back to 0 (and hope they all expire OTM.)
  2. No, your strategy won't work. Part #2 won't be allowed. In order to sell naked puts (which is a risky practice), you need margin. If your account falls to 0, your margin is really easy to calculate. It will equal 0, and you'll be out of business.

    Stock margin and option margin operate differently. Typically, the simple answer is that you can borrow 50% of a stock's value, but with options you cannot borrow except when using LEAPS. With LEAPS, I think you can borrow 25% of the amount if memory serves me correctly. The CBOE publishes a document outlining all of this, if you are interested, or you can contact your broker.
  3. spindr0


    The Federal Reserve's Reg T determines margin. Stocks can be bought (or sold) with an initial margin of 50%. There's a formula for selling naked options. For ease of discussion, it's approximately 20%.

    You must have a minmum of $2,000 in cash or equities for a broker to extend margin to you. Maintenance margin must be at least 25% tho brokers tend to require 30 to 40% (standard options are not marginable).

    You will be hit with a margin call if your account value falls below the maintenance margin. Many brokers will give you a few days to provide add'l cash or marginable securities. Others will liquidate your positions immediately.

    You might have to go back to the drawing board on this money making idea. Have you considered trying a Ponzi scheme? :)
  4. Just lol.
  5. Why not just keep selling options out to infinity in time and withdraw the money, viola... a true ATM. AMAZING!
  6. I agree that the OP's plan was absurd.

    But he doesn't know that. He is new to this. Can't we have a little sympathy for a rookie?

  7. MTE


    Rookie or no rookie, when someone asks a question like that, I'm sorry, but he/she deserves some "punishment". :D
  8. SForce


    You have 42 credit cards and each month you charge the minimum balance due to one of the other cards don't you?
  9. Tom1am


    Actually, the question is quite logical.

    The answer is we cant do it but the guberment can.

    :confused: :D
  10. spindr0


    #10     Jul 30, 2009