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How to calculate margins for an option spread?
- Thread starter takeshi
- Start date
Quote from takeshi:
Buy 40 May CALL at 0.50
Sell 40 June CALL at 0.75
Total credit = 0.25
May I know how much margin would I need to maintain if I were to enter the above trade?
Thanks
Takeshi
That's a short time spread. The short calls are treated as naked. Thus the margin is 20% less the net credit received (i.e. if done 10 times, the margin would be (40 X 1000 X .2) - (.25 x 4000) = 7k).
Best to check with your broker, and see what he requires.
For example, maintaince might be as high as 50% if it is a concentrated position.
Plus, account requirements can differ dramatically when you sell options naked. For example, Preferred Trade requires a minimum $65,000 account to sell uncovered options.
Quote from Preferred site: "Selling uncovered options may subject an investor to significant portfolio risk and unlimited loss potential. Only investors with significant option trading experience are approved to conduct naked option writing. Naked option approval is considered after the account has been funded with $65,000.00."
Here's a neat little calculator you can experiment with: Options Calc
Good Luck!
For example, maintaince might be as high as 50% if it is a concentrated position.
Plus, account requirements can differ dramatically when you sell options naked. For example, Preferred Trade requires a minimum $65,000 account to sell uncovered options.
Quote from Preferred site: "Selling uncovered options may subject an investor to significant portfolio risk and unlimited loss potential. Only investors with significant option trading experience are approved to conduct naked option writing. Naked option approval is considered after the account has been funded with $65,000.00."
Here's a neat little calculator you can experiment with: Options Calc
Good Luck!
Aside from your broker requirements, I think that:
Till the expiry of your long call, you short call is covered by your long call so there is no margin requirement for your short and options should be purchased by your cash and you can not get margin for that trade. After May, your short call will be naked and you will need usually max ( %20 of current price - out of the money, %10 of the current price , $250-$1000 per contract).
:eek:
Till the expiry of your long call, you short call is covered by your long call so there is no margin requirement for your short and options should be purchased by your cash and you can not get margin for that trade. After May, your short call will be naked and you will need usually max ( %20 of current price - out of the money, %10 of the current price , $250-$1000 per contract).
:eek:
This is what my broker posted... I have no idea what it means. Can someone dissect this for me? Thanks.
100% * option market value + maximum (((20% * underlying market value) - out of the money amount), 10% * underlying market value, $250 * number of contracts). 20% above is 15% for broad based index options. Short sale proceeds are applied to cash.
Suppose,
Stock = $42
Sell Naked May 45 Calls at $0.50
And Stock =$42
Sell Naked May 40 Calls at $2.50
What are my margins requirement?
100% * option market value + maximum (((20% * underlying market value) - out of the money amount), 10% * underlying market value, $250 * number of contracts). 20% above is 15% for broad based index options. Short sale proceeds are applied to cash.
Suppose,
Stock = $42
Sell Naked May 45 Calls at $0.50
And Stock =$42
Sell Naked May 40 Calls at $2.50
What are my margins requirement?
Quote from takeshi:
This is what my broker posted... I have no idea what it means. Can someone dissect this for me? Thanks.
100% * option market value + maximum (((20% * underlying market value) - out of the money amount), 10% * underlying market value, $250 * number of contracts). 20% above is 15% for broad based index options. Short sale proceeds are applied to cash.
Suppose,
Stock = $42
Sell Naked May 45 Calls at $0.50
And Stock =$42
Sell Naked May 40 Calls at $2.50
What are my margins requirement?
Ok Now you are talking about two calls that are both naked.
I am sure that from that 20% your broker is not Ameritrade and by the way they have a bug in their naked call calculation that have not fixed it yet.
For Naked May 45 call you will need:
%20 of 42=8.4 - Out of the money =(45-42) + 0.5=5.9
%10 of 42 +0.5=4.7
So the maximum of 590 , 420 and 250+50 for one contract will be 590
so if you sell 10 contracts you will need 5900 to do this transaction
That $50 is option price that will be variable and the money that you get from selling stocks will be deposited into your account as cash
For the second case:
%20 of 42=8.4 -out of the money (40-40) +2.5=12.70
%10 of 42 =4.2 +2.5=6.70
so the maximumof 12.70, 420 and 250+250 is 1270 and for 10 contacts you will need 12700.
Again the money that you get by selling the stock will be deposited into your account as cash but the latest option price will be used to calculate your margin requirements.
Please let me know if you do not understand it.
Thank you very much! Your explaination was really clear.
I'd assume that if I were to long a near month call and short a far month call, the margin required will be as if I'm selling naked for the far month right? The near month long call doesn't make any difference to the margin requirements.
I'd assume that if I were to long a near month call and short a far month call, the margin required will be as if I'm selling naked for the far month right? The near month long call doesn't make any difference to the margin requirements.
Quote from takeshi:
Thank you very much! Your explanation was really clear.
I'd assume that if I were to long a near month call and short a far month call, the margin required will be as if I'm selling naked for the far month right? The near month long call doesn't make any difference to the margin requirements.
True but not exactly.The covered near month part will use your cash and if the naked far month has a strike price of bigger than the near month one, it will not be considered as naked because it is covered by your first call but if the second one has the strike price of less than your long one, it will be considered as naked. Say for stock A which 42 now you buy call for 45 for next month and sell call for 50 for 4 months later, till the expiration date of your first call the second call will be covered by your first call. Say if the stock goes to 60 in two weeks you will not be trouble for your naked call because you always can buy it at 45. Of course the number of naked calls should be equal or less than the number of covered ones.
Quote from takeshi:
Thank you very much! Your explaination was really clear.
I'd assume that if I were to long a near month call and short a far month call, the margin required will be as if I'm selling naked for the far month right? The near month long call doesn't make any difference to the margin requirements.
Dude, did I not say exactly that in the first response to your question? Why the continued confusion? My advice is to improve your reading comprehension before dabbling in options.