Credit spread (underlying between long and short strikes)

[tferg11]

How is this situation treated in a margin account? I have never traded in a margin account and am curious how this is treated if you are not approved to write naked options.

 

[drownpruf]

How is this situation treated in a margin account? I have never traded in a margin account and am curious how this is treated if you are not approved to write naked options.

The risk in the spread is the req. Say you're short the 30/35 call spread... it's the same as the 30/35 long put spread (box arbitrage).

 

[Carl K]

A Credit Spread is a covered position, not naked.
Maximum loss is the difference between the strikes, minus credit received.

If legging in, Buy before you Sell.
If legging out, Buy before you Sell.
If the Buy is confirmed before you Sell, you should never be Naked.

 

[tferg11]

Thanks guys. If I have $5,000 in my account, can I sell one 100/95 put spread? Even though I don't have the cash to buy 100 shares if assigned

 

[drownpruf]

Thanks guys. If I have $5,000 in my account, can I sell one 100/95 put spread? Even though I don't have the cash to buy 100 shares if assigned

Sure, just close it out prior to exp.

 

[xandman]

If your new to options, stay away from expiration week altogether.

 

[Carl K]

Thanks guys. If I have $5,000 in my account, can I sell one 100/95 put spread? Even though I don't have the cash to buy 100 shares if assigned

Example #1, at Expiration both option strikes are ITM,
your Short is assigned to you & your Long assigns someone else $5 later.
The most you are down is $500 per contract.

Example #2, at Expiration both option strikes are OTM,
no one gets assigned, and you keep the credit you already received.

Example #3, at Expiration your Short option strike is ITM,
you are obligated for the amount it is ITM, but only up to the maximum
of your Long strike, where you are covered ($500/contract in this case).

You are not Naked with a Vertical spread.
If assigned, you would just sell the stock.

 

[drownpruf]

Example 4, you are between strikes and your long is exercised. You have to maintain $4,750 under RegT.

 

[Carl K]

Example 4, you are between strikes and your long is exercised. You have to maintain $4,750 under RegT.

Misinformation !
Between strikes was covered in Example #3.

You do not have to maintain cash for your Long positions.

 

[drownpruf]

Misinformation !
Between strikes was covered in Example #3.

You do not have to maintain cash for your Long positions.

Example #3 only relates to both options expiring ITM.

You will (need cash to maintain Reg T compliance) if the short is OTM and you do not cover the spread or sell the long prior to the close on LTD. The deeper call, if allowed to expire and assuming shares close between-strikes, will exercise automatically into long shares. FRB Reg T requires 50% margin to hold overnight at the open on Monday.

"If assigned you would just sell the stock" is incorrect. He's long the deeper call which would be automatically exercised (at exp). He would need to exercise (if assigned "early" on the short) the long call, or sell the call and buy shares. The only post-exp scenario he needs to worry about is auto-exercise of his long call if the short goes off OTM (series expires mid-strikes)