Best thing to do with cash after selling premium?

[Put_Master]

I will restate this one more time using 2 different situations:

Example one.... , You have an IRA cash account, and want to sell cash secured puts. But you are $100 short of being able to sell one additional put.
Tell your broker to use the put credit to give you that extra $100, so you can sell the additional put.
The computer may stop you. But your broker can over ride the computer.

If it is a non IRA type account, and you simply don't want to be charged margin, then the computer should allow you to use the put credit to sell that extra put.

Example 2..... Assume you have an account that allows margin, and you want to over spend your account without being charged margin interest. You can use the credit received from a buy/write call, to either eliminate the margin or reduce the amount of margin you are on.
Assume you have $10,000 in your account, but buying the stock at the price and quantity you want, will cost you $10,500.
If the credit earned is $500 or more, then you will NOT be charged margin interest.
However, the trade may need to be placed simutaneously. Thus a buy/write, vs a buy and then write days later.

I trade my parents 2 accounts for them, and I do both of the above regularly.
You folks keep telling me that I can't do what I've been doing for years.
But again.... for selling the IRA put, you may have to ask the broker to over ride the computer, as the computer may not take the credit into account.
So I guess i can either believe you, or my own lying eyes.

 

[Put_Master]

Quote from blackjack007:

you're BSing. If an option has a $2000 margin requirement and your account has $1600, you can't sell the option. Period. no broker wll let you do that.

if your account has $2001, you can sell the option but the $400 premium is not available to write additional options. That's because your account still has a value of $2001: you would have $2401 in cash but the value of the option is ($400) because it's sold short.

i find it incredible that you've ever written an option before if you don't know something as basic as this.

You example is ridiculous, because you are assuming the put seller is at max margin, to the extent that if the account value drops one penny, they are in a margin call.

Try a more realistic example.

 

[newwurldmn]

Quote from Put_Master:

You example is ridiculous, because you are assuming the put seller is at max margin, to the extent that if the account value drops one penny, they are in a margin call.
Try a more realistic example.

According your above post this would be allowed. You are saying that you don't need to post the premium as part of your margin even though reg t explicitly requires it. Even te schwab options margin manual states this. The SEC rules don't apply to you I guess.

 

[Put_Master]

Quote from newwurldmn:

According your above post this would be allowed. You are saying that you don't need to post the premium as part of your margin even though reg t explicitly requires it. Even te schwab options margin manual states this. The SEC rules don't apply to you I guess.

The premium does not help you in a level 3 type account, because the margin requirement will increase by the amount of the credit.
But in a level 1 type account the put or call credit can help you complete the trade you desire, if you are short the needed cash for that extra contract.
So the boottom line is.... whether you can use the credit or not, depends on the type account you are trading.

 

[Don Bright]

Quote from blkcrk103:

I was curious if any of you have any good ideas on the best way to use the extra cash in your account after selling premium?

Do you just leave it in the sweep account or do you park it in something else until you need it? Do you use this to neutralize the deltas in your short position as much as possible?

Thanks in advance

Not sure if you're serious, because of the old joke about how we, on the trading floor would sell calls so we could buy more puts.

But, if your retail broker actually allows you to use the cash for anything at all, first I'm surprised, secondly, just for normal no risk conversions that give you better than Street interest.

 

[Put_Master]

Quote from Don Bright:

Not sure if you're serious, because of the old joke about how we, on the trading floor would sell calls so we could buy more puts.
But, if your retail broker actually allows you to use the cash for anything at all, first I'm surprised, secondly, just for normal no risk conversions that give you better than Street interest.

Whether you can use the put or call premium, depends on the type account you are trading in.
In a level 3 type account, the credit doesn't do you any good, as the margin requirement is simply increased by the amount of the credit.
So the credit basically gets neutralized there.
But in a level one type account, the credit can be used to reduce margin and/or to sell that additional contract.

 

[diaoptions]

Put_Master ........ As an advocator against excessive leverage I'm surprised you would recommend dipping into premium credit from an open trade to place additional trades.

I find that puzzling.




-----

 

[Put_Master]

Quote from diaoptions:
Put_Master ... As an advocator against excessive leverage I'm surprised you would recommend dipping into premium credit from an open trade to place additional trades. I find that puzzling.

You seem to assume any use of leverage is excessive.
The "context' that I've used to describe leverage as "excessive" is.... if you are unable to buy most of your stocks, if put to you.
Using margin examples of 5, 10, 15 or more times your account value.
Using the above examples of excessive margin, an investor would be uable to buy 95% of his stocks. Thus his only alternative is to close for a loss. Perhaps a severe loss. Perhaps a total 100% wipe out of his account, depending on when he closed it.

I use leverage most of the time myself.
There is nothing wrong with leverage. It's a fantastic tool offered to investors. But it must be used intelligently.

If an investor is using a spread type strategy for their portfolio, such as credit spreads or IC's,... and they are on 10 times more "potential" margin than their account value,... and their spreads are trading an average of 10 - 15% otm,... that really is not much of a safety cushion, considering you are at risk of taking of a severe or total loss.
WHY?
Because using that much margin, buying the stocks is simply NOT an option. The only choice you have is when to close and how severe a loss to take.

My definition of excessive leverage is, when you lose the ability to consider buying your stocks. And if you are on 10 times leverage, you will be lucky to be able to buy 5% of your stocks.
WHY?
If you are in that situation, your stocks will already be trading BELOW your strikes to begin with, before you even think about buying any of them.
In addition, any other stock(s) you instead closed for a loss, will have the affect of lowering your already inadequate account value.
Thus making it even more difficult to even consider buying any portion of the remaining stocks.
Since you can't buy them... they too must be closed for a loss.

Remember, it is NOT stocks dropping that kills investors. It's stocks dropping while on excessive leverage that kills them.
Or, if you are doing IC's on excessive leverage, it can be stocks rising "or" falling that kill you.

 

[newwurldmn]

Quote from Put_Master:

The premium does not help you in a level 3 type account, because the margin requirement will increase by the amount of the credit.
But in a level 1 type account the put or call credit can help you complete the trade you desire, if you are short the needed cash for that extra contract.
So the boottom line is.... whether you can use the credit or not, depends on the type account you are trading.

The levels only give you permission to trade more types of strategies. It doesn't allow you trade more contracts.

 

[Put_Master]

Quote from newwurldmn:

The levels only give you permission to trade more types of strategies. It doesn't allow you trade more contracts.

I suggest you check with your broker.
In a lower level "one" acount you can use the credit to sell an additional contract and/or to reduce your margin.