Broker silently changed the conditions...

E

earth_imperator

In my CashAcct the CashRequirement for a CashSecuredPut (ie. shortselling a Put)
was all the time "Strike minus Premium".
But today this formula no longer works! They seem to have changed the CashRequirement to the full Strike !
The support says it was always so and to protect themselves, blah blah blah...
("... to ensure the security of the entire trade based on the obligation we're taking...."

The obligations they are taking? No, they are taking not a single obligation! It's all my own obligations by financing the whole outcome in advance, there is not a single cent they have to pay under any conditions! That's pure maths! They seem to wrongly see/treat the CashAcct much like a MarginAcct...
 
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earth_imperator said:
In my CashAcct the CashRequirement for a CashSecuredPut (ie. shortselling a Put)
was all the time "Strike minus Premium".
But today this formula no longer works! They seem to have changed the CashRequirement to the full Strike !
The support says it was always so and to protect themselves, blah blah blah...
("... to ensure the security of the entire trade based on the obligation we're taking...."

The obligations they are taking? No, they are taking not a single obligation! It's all my own obligations by financing the whole outcome in advance, there is not a single cent they have to pay under any conditions! That's pure maths!
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Yeah that doesn't make any sense at all.
So what is it now? They lock up the whole contract selling price? Ie a $10 put selling for $10.70 they freeze $1070? It can only go to zero. You at least keep the premium.

I bet they are right, it has always been like that. It was strike minus premium, but they also held the premium... ie the total held back is in fact the strike.
 
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vanzandt said:
Yeah that doesn't make any sense at all.
So what is it now? They lock up the whole contract selling price? Ie a $10 put selling for $10.70 they freeze $1070? It can only go to zero. You at least keep the premium.
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A real world example:
previously only $20 (= strike minus premium) was needed for shortselling a Put with strike=4 and Premium=3.80.
Now they say I need $400 !
This is ridiculous! B/c they now lock $400 plus the credit $380, in total $780 !!! That's sicko logic they now apply!
That trade can never lose more than "strike - premium", ie. $20, but they want a collateral that is 20 times of that (or even 39 times of that)!...
 
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earth_imperator said:
A real world example:
previously only $20 (= strike minus premium) was needed for shortselling a Put with strike=4 and Premium=3.80.
Now they say I need $400 !
This is ridiculous!
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If a put has a $4 strike, they are gonna require $400.

When you say "premium" I'm not sure how you are using that term.

Right now the $152.50 put on WMT (5/19) is $1.33 bid.
You sell that, you get $133

Do you think they are going to let you go naked on the rest of $151.17 or $1517/contract?

Say WMT closed at $152.50 today and it drops $100 tomorrow. You are $10,000 in the hole.
If that money is not in your account, the broker would have to eat that. And that ain't happenin'.
 
vanzandt said:
If a put has a $4 strike, they are gonna require $400.
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That's mathematically BS! B/c there is no rationale for it as the loss risk is limited to "strike minus premium". Just try it out in any options tool.
When you say "premium" I'm not sure how you are using that term.
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The price of options is usually called "premium". When writing options (ie. shortselling) one calls it also as "credit".

And: I'm talking of a CashAcct where everything has to be "covered", ie. pre-financed by cash that gets locked for the duration of the trade.
 
If you sell a put with a $4 strike, that means you are signing a contract to buy 100 shares of that stock at $4.
If the stock goes to a penny... the buyer of that put buys a 100 shares for $1 TOTAL... obligated to pay him $400 for those shares. IE $399 is what you have lost.
 
vanzandt said:
If you sell a put with a $4 strike, that means you are signing a contract to buy 100 shares of that stock at $4.
If the stock goes to a penny... the buyer of that put buys a 100 shares for $1 TOTAL... obligated to pay him $400 for those shares. IE $399 is what you have lost.
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WRONG! You have to include the proceeds you get from the shortselling Then the math looks much different As said when you shortsell for 3.80 then $380 comes from that sale, and the rest ($20) from your pocket...
 
earth_imperator said:
That's mathematically BS! B/c there is no rationale for it as the loss risk is limited to "strike minus premium". Just try it out in any options tool.

The price of options is usually called "premium". When writing options (ie. shortselling) one calls it also as "credit".
More...
Look... if you sold that WMT put tomorrow, you would get a $133 credit. If WMT drops $100 --- You are short that put. To buy that put back tomorrow, IT WILL COST YOU $10,000 to cover your short.

You don't need an "options simulator" to understand this.
 
earth_imperator said:
WRONG! You have to include the proceeds you get from the shortselling Then the math looks much different As said when you shortsell for 3.80 then $380 comes from that sale, and the rest ($20) from your pocket...
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I AM INCLUDING IT.
SELL THE $152.50 PUT ON WMT AND YOUR CREDIT IS $133 ----> NOT $15,250
 
vanzandt said:
Look... if you sold that WMT put tomorrow, you would get a $133 credit. If WMT drops $100 --- You are short that put. To buy that put back tomorrow, IT WILL COST YOU $10,000 to cover your short.

You don't need an "options simulator" to understand this.
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Your max loss is "strike - premium", as was said. Take a look at the PnL diagram:
https://optioncreator.com/stva2s2
Of course multiply the result by 100, the usual multiplier.

Your WMT example is not that informative. Better comment my example.
 
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