How do holds work when selling naked options?

[riskfreetrading]

Quote from dagnyt:

My intent is to not allow you to spread erroneous information among people who come to this board seeking help.

The simple truth is that writing a covered call will not prevent the margin calls or buy-ins that you foresee for naked put sellers.

That may or may not be the main point of your posts, but you have said it more than once and it is simply not true.

Mark

It is you who is spreading wrong information. Let me give an example to the readers so that they see that you are not understanding even basic things (even if you think you do).

Take a stock at 100, strike 120, make vol high and/or time long (such as a leaps).

Now compute margin requirement for these two positions:

1. Short put at strike 120.
2. CCW with short call at 120.

The loss and gains of above two positions are the same at the end as defined by expiration date.

Now compute margin requirements of both positions at open.

Are the margin requirement of both positions the same at opening? Which of the two implementations will you chose if you area a cash secured guy? Would you now follow the advice of the selfappointed expert?

 

[spindr0]

Did you know about the margin theoretical point I raised before reading my posts here? If yes when did you know about it, under what circumstances, why, etc?

It was a cloudy Tuesday many years ago just before the spring thaw. The sun was bright, radiating across the tundra (I was trekking across the Steppes). I was thinking about naked put margin and it was a light bulb moment. I said to myself, "I can't wait until riskfree enlightens the Elite Trader BB with this point and ask me when I first knew about it.

The point I raised was just a start to show other things. You seem to understand that covered calls and puts are not the same position from a margin point of view. The general result is that they are the same in loss and gains at the end, but there are not the same DURING the life of the positions in terms of other things.

I figured out that they're not the same nearly 30 years ago when I first read what margin is: 50% for stock and approximately 20% for naked writes. You're off on another erroneous wild goose chase since on a one to one comparison, the slight margin differences between them means nothing in the real world.

Maybe I should simply stop sharing.

Now there's an idea for serious consideration.

 

[spindr0]

PS

I wanted to get people to think, as I stated in my first post on this thread. I may have explicitely stated that I will comment in form of questions to provoke peoples' thinking.

LOLOL. It would be helpful if you did the same.

 

[income trader]

Quote from TWORIP:

I have been playing around in Virtual trade making consistant gains so far.

Virtual trading is dangerous for this reason...

TWORIP, there are huge differences between live trading and virtual trading. A trade that gets executed in a virtual account may or may not execute in real life trading!

I suggest you do some more homework on your strategy...

 

[spindr0]

Take a stock at 100, strike 120, make vol high and/or time long (such as a leaps).
Now compute margin requirement for these two positions:

1. Short put at strike 120.
2. CCW with short call at 120.

The loss and gains of above two positions are the same at the end as defined by expiration date.
Now compute margin requirements of both positions at open.
Are the margin requirement of both positions the same at opening?

This is a ridiculous example and question. How could they be equal? Initial margin on stock is 2-1/2 times that of the naked put, before premium adjustments.

Which of the two implementations will you chose if you area a cash secured guy? Would you now follow the advice of the selfappointed expert?

Do you have any idea what cash secured means?

The initial cash secured amount for each of these isn't the same. But the difference is peanuts. For the CC, you'll get a higher premium whereas the put will earn more interest on the higher cash balance. In the end, the total amount risked and earned will be the same, when all components have been accounted for. That's the basis of put/call parity and equivalent positions.

The more you post, the more Mark sounds like an expert.

 

[spindr0]

TWORIP, there are huge differences between live trading and virtual trading. A trade that gets executed in a virtual account may or may not execute in real life trading!

Not only is virtual trading a night and day difference from live trading but hindsight also generates the best answer.

TWORIP needs to understand more about the behavior of options in order to comprehend that you can't roll your way out of bad positions. Rolling is a losing battle unless you step up the leveage and you get a reversal that goes no further than your new maximum profit point otherwise the other side becomes a problem. And he wants to reduce leverage when rolling. Losses will be locked in. Gaps will increase losses. Rolling just before reversals can make things even worse. But hindsight trading in a Simulator is a fun game

 

[JJacksET4]

Mark,

I understand and appreciate what you are saying - it is possible for a 5 strike put in an extreme case for example to quote at 4.5/5.5 and you could find yourself at a point of $-50 in your account if you had zero cash after the put sell, etc.

I do agree with you that in a scenario such as this, the covered call won't give a person any advantage over the put write, as the call spread would likely be the same and the person would still find themselves in a $50 hole.

It isn't just net short positions that can go negative however - even a bull call spread can go negative. For example, if you buy a 80 call, sell a 90 call for say $150, now the stock plunges to $10 a share, they might price out such as:
80 call - bid .05 / ask .25
90 call - bid .05 / ask .20

so, to close, you'd get .05 for your 80, but have to pay .20 for your 90. I've actually had Bull Call Spreads go negative on me. However, a person in this situation also knows that in reality, both sides will expire and they won't have to buy the position back. Long calendar spreads can also go negative.

I have never had a cash account to go negative, but I suppose it could happen and I will believe you that the broker wouldn't allow it to remain so. Personally, I would never go to the absolute edge of what I could sell anyways. For example, if I had $4000 in an cash account, I would sell at most a 35 put (quite possibly less) - since it's always good to have some extra money there for adjustments, etc. anyways.

So, there is really nothing big new here IMO - If we're all going to worry about almost impossible scenarios, I think we should just go and buy lottery tickets. Actually I think a more worrysome item realistically is like what apparently happened to that one poster - he was long some GOOG calls, they were out of the money but he didn't close them, they went in the money just barely at expiration and they were automatically exercised for him, even though his account didn't have the money for all those shares.

IMO - The automatic exercise is not a good thing - the call or put holder only should have the discretion of exercising at expiration - it should not be done automatically just because some stupid people forgot to ever do anything with their in the money options.

JJacksET4

 

[riskfreetrading]

Quote from JJacksET4:

Mark,

I understand and appreciate what you are saying - it is possible for a 5 strike put in an extreme case for example to quote at 4.5/5.5 and you could find yourself at a point of $-50 in your account if you had zero cash after the put sell, etc.

I do agree with you that in a scenario such as this, the covered call won't give a person any advantage over the put write, as the call spread would likely be the same and the person would still find themselves in a $50 hole.

The covered call allows you to stay in position till the end if you chose to, which the short put may not.

From a margining standpoint, the CC is giving an option at no charge when compared to the short put. As any option has a non positive value, the CC is worth more (not in loss and gains but in alternatives from a margin point of view) if you were to find youself in above situation.

 

[mike007]

Quote from riskfreetrading:


Now compute margin requirement for these two positions:

1. Short put at strike 120.
2. CCW with short call at 120.

1. Margin required is $12,000- premium sold on the put
2. (I am guessing you are buying at 100??) $10,000- the premium sold on the 120 call

Max loss is how my broker always calculates margin requirements.

 

[spindr0]

Quote from riskfreetrading:

The covered call allows you to stay in position till the end if you chose to, which the short put may not.

Here's your example:

Take a stock at 100, strike 120, make vol high and/or time long (such as a leaps).

Now compute margin requirement for these two positions:

1. Short put at strike 120.
2. CCW with short call at 120.

Instead of telling people they're wrong, tell us at what the stock price, volatility, etc. must be where one will be unable to "stay in the position" (the short put). Detail all pricing components necessary to calculate the margin requirement. You can use the CBOE Margin Calculator at:

http://www.cboe.com/tradtool/mCalc/default.aspx