Global Economic Intersection
Advertisement
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitIQ
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitIQ
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
Global Economic Intersection
No Result
View All Result

The Price of Being Naked

admin by admin
February 14, 2014
in Uncategorized
0
0
SHARES
0
VIEWS
Share on FacebookShare on Twitter

Online Trading Academy Article of the Week

by Russ Allen, Online Trading Academy Instructor

There are quite a few option strategies that involve selling options “naked” – that is, selling options without having any position in the underlying asset. In the case of selling puts, naked means also not having 100% of the cash in the account that would be required to pay for the stock if assigned. (If we sold puts and we did have 100% of the cash required, then the short puts would not be naked – they would be “cash-secured”).

When we sell naked options, we are required by the options exchange to put up security in case the trade goes against us. Individual brokers may then add additional rules if they feel they need more protection. The reason for the margin requirement is that by selling an option, we have obligated ourselves to buy stock we may not want (if we sold puts), or to sell stock we don’t have (if we sold calls). In either case, that obligation could potentially result in our having to take a large loss on the stock. If we can’t handle that loss, our broker will be on the hook, and ultimately the exchange would have to make it good if our broker failed. So they require that we put up security.

The rules seem kind of obscure at first glance, but they’re really not hard to understand when we dig into them, so here we go.

Here’s the margin requirement for uncovered (“naked”) short options, from the Chicago Board Options Exchange’s Margin Manual:

  1. 100% of option proceeds,
  2. plus 20% of the underlying security’s value,
  3. less the out-of-the-money amount, if any,
  4. with a minimum for calls of the option proceeds plus 10% of the security’s value,
  5. or a minimum for puts of the option proceeds plus 10% of the put strike price.
  6. Some brokers add to these rules: Tradestation, for instance adds “or $250 per contract, whichever is greater.”

Yikes. What does this mean? Here’s the breakdown.

First, the margin requirement always includes “100% of option proceeds.” So the clearing house initially keeps everything we get from the sale of the option – we don’t get to spend it while the option position is in place.

After that, the rules differ slightly for puts vs calls. Puts are the simpler case.

For puts, we need to provide money from our own funds of 20% of the of the stock’s value; but we can deduct from that requirement the amount that the put is out of the money. If deducting that OTM amount takes the requirement down to less than 10% of the put strike price, then 10% is the number. Finally, for Tradestation and some other brokers, a minimum dollar amount is imposed. Tradestation makes the minimum at least $250 per contract ($2.50 per share).

Here’s an example: Stock at $100, 95-strike put at $2.

We would not get any of the $2 put premium initially – it is the first part of the margin requirement.

In addition, we have to calculate 20% of the underlying price. 20% of $100 is $20 per share.

From this $20 we can subtract the amount by which the put is out of the money. This is $5 ($100 stock price less $95 put strike). $20 less $5 leaves $15.

Since $15 is more than 10% of the $95 strike price, $15 is the amount of our money that would be required. Selling the put for $2 costs us $15 of our own money in margin.

How and when do we get our $15 back?

That happens when the position is closed out. There are only a few ways that can happen.

  1. We could buy the options back prior to expiration, at a profit. Say the stock does not drop, and the value of the put option deteriorates. A few weeks later, it is quoted at $.05 per share. We buy it back for 5 cents per share. We then get back our $15 margin, plus the $2 original premium. Deducting the 5 cents from the $2 premium, our profit is $1.95 per share, and our margin is back in our account.
  2. We could buy the options back on or before expiration day, at a loss. Say the stock drops to $90, and the put option is quoted at $5.00 per share. We buy it back for $5.00. This $5 cost amounts to the $2 we were originally paid, plus another $3 that comes out of our own $15 in margin. We get the remaining $12 of our $15 margin back, and are $3 poorer.
  3. The option could expire with no value. Once the expiration date has passed, our $15 plus the $2 premium is released to us, and we are $2 richer.
  4. The option could be assigned. This means that after we sold the option, some put owner decided to exercise one of those puts. The put owner tenders his stock, and receives payment from the clearing house equal to the put strike price ($95 per share). The clearing house then selects a put seller at random to be assigned – that is, to be forced to buy the stock. If that’s us, then we receive the stock, and the $95 per share strike price is deducted from out account. After taking out 100% of the money required to buy the stock, the clearing house then credits us back for our $15 margin plus the original $2 put premium. At this point, we may have either a profit or a loss. We will now own the stock, and our cost will be the $95 strike price we were forced to pay, less the $2 we received as premium for the put. That’s a net cost of $93 per share. If we can sell the stock for more than $93 we win, otherwise we lose.

Note that while the short put position was in place, before any of the above four eventualities occurred, it’s possible that we would have been required to put up additional margin. Any increase in value of the put after we sell it will result in additional margin being required. The house needs a 20% buffer to be maintained at all times.

For short calls, the margin rules are similar, with one exception: the 10% minimum margin is applied to the stock price, rather than the strike price. Note that the sky is the limit on the loss on naked short calls, since the stock could go up to any price.

When all is said and done, a simple rule of thumb is to figure on 20% of the strike price for short puts, or 20% of the stock price for short calls, and expect to pony up more if the trade goes against you.

Now, wasn’t that easy?


Previous Post

Update: Is Bitcoin Coming Unglued?

Next Post

What We Read Today 14 February 2014

Related Posts

eBay Unveils Sports-Themed NFT Collection
Business

eBay Unveils Sports-Themed NFT Collection

by John Wanguba
May 25, 2022
SpaceX To Get $1.7B In New Funding To Send Valuation to $127B
Business

SpaceX To Get $1.7B In New Funding To Send Valuation to $127B

by John Wanguba
May 25, 2022
Hyundai Signs Deal to Establish Full EV and Battery Factories in Georgia, US
Business

Hyundai Signs Deal to Establish Full EV and Battery Factories in Georgia, US

by John Wanguba
May 25, 2022
US Tech Giants Meta, Google, and Amazon Could Profit from Ukraine War – Media Guru
Business

US Tech Giants Meta, Google, and Amazon Could Profit from Ukraine War – Media Guru

by John Wanguba
May 25, 2022
Google Looks For New Talent To Lead Global Web3 Efforts
Business

Google Looks For New Talent To Lead Global Web3 Efforts

by John Wanguba
May 25, 2022
Next Post

What We Read Today 14 February 2014

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Browse by Category

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Browse by Tags

adoption altcoins banking Binance Bitcoin Bitcoin adoption Bitcoin market Bitcoin mining blockchain BTC business Coinbase crypto crypto adoption cryptocurrency crypto exchange crypto market crypto regulation decentralized finance DeFi digital assets Elon Musk ETH Ethereum Ethereum blockchain finance funding government investment market analysis Metaverse mining NFT NFT marketplace NFTs nonfungible tokens nonfungible tokens (NFTs) price analysis regulation Russia social media technology Tesla the US Twitter

Archives

  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • August 2010
  • August 2009

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized
Global Economic Intersection

After nearly 11 years of 24/7/365 operation, Global Economic Intersection co-founders Steven Hansen and John Lounsbury are retiring. The new owner, a global media company in London, is in the process of completing the set-up of Global Economic Intersection files in their system and publishing platform. The official website ownership transfer took place on 24 August.

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Recent Posts

  • eBay Unveils Sports-Themed NFT Collection
  • SpaceX To Get $1.7B In New Funding To Send Valuation to $127B
  • Hyundai Signs Deal to Establish Full EV and Battery Factories in Georgia, US

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

No Result
View All Result
  • Home
  • Contact Us
  • Bitcoin Robot
    • Bitcoin Profit
    • Bitcoin Code
    • Quantum AI
    • eKrona Cryptocurrency
    • Bitcoin Up
    • Bitcoin Prime
    • Yuan Pay Group
    • Immediate Profit
    • BitIQ
    • Bitcoin Loophole
    • Crypto Boom
    • Bitcoin Era
    • Bitcoin Treasure
    • Bitcoin Lucro
    • Bitcoin System
    • Oil Profit
    • The News Spy
    • British Bitcoin Profit
    • Bitcoin Trader
  • Bitcoin Reddit

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

en English
ar Arabicbg Bulgarianda Danishnl Dutchen Englishfi Finnishfr Frenchde Germanel Greekit Italianja Japaneselv Latvianno Norwegianpl Polishpt Portuguesero Romanianes Spanishsv Swedish