Long Call vs. Naked Short Put

[Sunshine4ever]

Quote from squarepush3r:

if you are bullish on an option, you have 2 options i see.

Depends on the time frame .... if your time frame is a BIT LONGER I'd suggest the following unortodox approach.
1. sell close to the money put and collect a fat premium

2. if you were right about direction of the move by expiration you keep the premium. Repeat

3. if you were wrong (the underlying moved lower and below your put's strike price) then you get assingned a long position, plus keep the premium from selling the put. So you end up being long on that market anyway, but having a head start (the premium you collected).

If your time frame is SHORT ... I'd go for buying ITM calls. Your risk is limitted to whatever you paid for the call plus delta for ITM options is almost 1.

 

[Cache Landing]

I personally don't like naked puts because of the margin requirements mentioned above. There are much better positions out there that accomplich the same thing with a better risk profile.

But if you are set on either trading long calls or short puts there is a very simple rule to go by. Buy cheap and sell expensive.

That is, if an IV drop is more likely than an IV increase, then sell the puts. If the opposite is true then buy the calls.

 

[El OchoCinco]

Quote from squarepush3r:

thanks for the reply spindr0, I may be confused on something then.

If I am truly bullish, could I sell PUTS to increase my cash availability to buy more CALLS? My previous thinking was that money had to be used for both pretty similarly, so it was a pick or choose decision based on your confidence.

Selling puts and buying calls is just a synthetic stock long position.

Why don't you look at a risk graph of short puts and long calls and see the difference between the two.

One is limited risk, unlimited reward

One is limited reward, significant risk

Which one you choose depends on your outlook for the stock, the implied volatility, and time frame.

 

[commiebat]

Quote from squarepush3r:

If I am truly bullish, could I sell PUTS to increase my cash availability to buy more CALLS?

Selling puts would increase your cash balance, but it would decrease the amount of capital you have to invest. Remember, you must keep marginable securities in your account to maintain a naked put position, and calls are not marginable securities.

It is possible to write a whole bunch of puts, get lots of cash in your account, and be out of margin room - in which case you wouldn't be able to buy calls at all.

Writing a naked put is the same thing as writing a covered call, give or take a little margin requirement. If that's not the investment you want to hold, you shouldn't be opening the position just because it's a credit position.

 

[squarepush3r]

Quote from commiebat:

Selling puts would increase your cash balance, but it would decrease the amount of capital you have to invest. Remember, you must keep marginable securities in your account to maintain a naked put position, and calls are not marginable securities.

It is possible to write a whole bunch of puts, get lots of cash in your account, and be out of margin room - in which case you wouldn't be able to buy calls at all.

Writing a naked put is the same thing as writing a covered call, give or take a little margin requirement. If that's not the investment you want to hold, you shouldn't be opening the position just because it's a credit position.

oh i see. Since CALLS are not marginable, then I couldn't use them with my PUT money i have.

However, I theoretically could use that money to buy long stock as well, so i could use 80% of my proceeds to buy long stock (keep the 20% to cover the margin requirements)

 

[commiebat]

Quote from squarepush3r:

I theoretically could use that money to buy long stock as well, so i could use 80% of my proceeds to buy long stock (keep the 20% to cover the margin requirements)

You theoretically could use any of the cash in your account to buy stock. But in reality, the credit you get from writing a put is not even enough to maintain the naked put. You are losing buying power while you gain cash.

 

[El OchoCinco]

Quote from squarepush3r:

oh i see. Since CALLS are not marginable, then I couldn't use them with my PUT money i have.

However, I theoretically could use that money to buy long stock as well, so i could use 80% of my proceeds to buy long stock (keep the 20% to cover the margin requirements)

We have a failure to communicate here. You know nothing of the margin rules regarding options which is the foundation for much of your misunderstanding.

Best way for you to learn is assume a stock is at $50 and you sell the $45 put short for $3.00.

The margin requirements are:

Unsecured Short Puts & Naked Calls (Equity and Index) 25% of the underlying market price + the premium - amount out of the money OR 10% of the underlying market price (or strike price for O-T-M puts) + the premium, whichever is greater.*

Why dont you try and calculate the actual margin used to short this put and compare it with buying a long call at hypothetically the same price and compare margin SET ASIDE requirement of the -put with debit of +call and profit potentials of each.

Best way to learn since this is where you are making the fundamental mistake.

 

[squarepush3r]

Quote from commiebat:

You theoretically could use any of the cash in your account to buy stock. But in reality, the credit you get from writing a put is not even enough to maintain the naked put. You are losing buying power while you gain cash.

thats interesting, since say i do run off Reg T margin, lets take this hypothetical:

My account has $1000 cash (thats all) ..

now, say I sell $5000 worth of naked PUTS (this will be my max since PUT + 20% is $1000). Now I have $5000 + $1000 cash (note the original $1000 is taken up in margin, so I have $5000 marginable)

So I could buy $5000 x 2 (reg t margin 50%) + $1000 (non marginable money) = $11000 worth of stocks!!

Wow, thats pretty powerful for $1000 lol! Granted I could lose it all real fast if the stock were to dive, but pretty nice moves!

 

[El OchoCinco]

Quote from squarepush3r:

thats interesting, since say i do run off Reg T margin, lets take this hypothetical:

My account has $1000 cash (thats all) ..

now, say I sell $5000 worth of naked PUTS (this will be my max since PUT + 20% is $1000). Now I have $5000 + $1000 cash (note the original $1000 is taken up in margin, so I have $5000 marginable)

So I could buy $5000 x 2 (reg t margin 50%) + $1000 (non marginable money) = $11000 worth of stocks!!

Wow, thats pretty powerful for $1000 lol! Granted I could lose it all real fast if the stock were to dive, but pretty nice moves!

You are making this quite difficult. Maybe the math is not clear but 20% of $5,000 please quote me where you get that from since I never said or posted a margin requirement is 20% of the premium collected. Maybe you are referring to the stock value or strike value but you need to be clear.

First of all, you are not going to be able to sell $5,000 in short puts with $1,000 in cash in your account. Lets not assume brokers are that stupid in letting you expose them to significant risks.

Second, the cash received from short put sales is set aside to MEET YOUR MARGIN REQUIREMENT. Did you not read the margin requirement as including the premium.

I applaud your efforts to learn but you are not thinking of the big picture here.

 

[squarepush3r]

Quote from optioncoach:

You are making this quite difficult. Maybe the math is not clear but 20% of $5,000 please quote me where you get that from since I never said or posted a margin requirement is 20% of the premium collected. Maybe you are referring to the stock value or strike value but you need to be clear.

First of all, you are not going to be able to sell $5,000 in short puts with $1,000 in cash in your account. Lets not assume brokers are that stupid in letting you expose them to significant risks.

Second, the cash received from short put sales is set aside to MEET YOUR MARGIN REQUIREMENT. Did you not read the margin requirement as including the premium.

I applaud your efforts to learn but you are not thinking of the big picture here.

Hi optionscoach, thanks for your continued help.

http://www.interactivebrokers.com/en/trading/marginRequirements/margin.php?p=ssf&ib_entity=llc

Short Naked Call 100% * option market value + maximum (((20% * underlying market value) - out of the money amount), 10% * underlying market value, $2.50 * multiplier * number of contracts). 20% above is 15% for broad based index options. Short sale proceeds are applied to cash. Not allowed for IRA accounts.

So my broker has a (1)20% margin requirement. So, I could sell up to $5000 in puts ($5000 x 20% = $1000).


Is that ok?

Oh, I am basing my assumption on the earlier poster who said, that I can use the put itself as collateral.

- proceeds received from sale of puts(s) may be applied to the initial margin requirement

maybe i misinterpreted that? (be right back gotta goto the bank and get some food real quick)