Long Call vs. Naked Short Put

[spindr0]

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.

Huh? Assuming OTM puts, if the margin requirement is 20% of the strike, do you really think that the premium received is going to exceed the margin requirement and increase your cash availability? Your cash is going to be tied up supporting your short put positions.

With all due respect, you should consider doing some serious reading before diving into the deep end of the pool. Based on your questions, your current understanding of margin and option strategies needs a lot of work and you're going to find that there's no water in the pool right now (grin)

 

[Cache Landing]

Quote from squarepush3r:

Hi optionscoach, thanks for your continued help.

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



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.



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

That's way off man. You can't use a sold put as collateral for anything. You sold it, you didn't buy it.

Think about this idea for a minute. Brokers won't give you additional leverage on options. If you buy an option, you are restricted to the cash in your account. If you sell an option, you'll be able to sell even less than that.

Options are geared already, they don't need to be leveraged too.

 

[El OchoCinco]

Quote from squarepush3r:

Hi optionscoach, thanks for your continued help.

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



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.



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

I cannot help you if you do not try to analyze what we said. I asked you to do some homework in my post and you still have ignroed it. 20% of the underlying strike value and the proceeds of the put short are applied to the requirements

= if margin requirement is $1,500 and you take in $300 in cash, they apply the $300 against the $1,500 so you kick in only $1,200 of your own money and ALL $1,500 is set aside in your account not for touching.

Do the example I listed above in my earlier post.

 

[spindr0]

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

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!![/B]

LOL. That's what some of us call monkey math (g)

I'm not sure what that means. A $50 strike or $5,000 in premium received? Either way, if you only have $1,000 in cash in your account, no broker is going to let you short $5,000 worth of anything. So let's assume your account contains marginable securities and $1,000 of free cash.

Let's do something more realistic. With a stock at $50, you short 1 naked put for a credit of $2. Your margin requirement is $1,200 but that can be reduced by the put proceeds. So now, you have $1,200 in your account and a margin requirement of $1,000. That means you now have $200 available to buy calls. That's about $5,800 short of your calculation.

By all means, ask questions. But don't trade until you understand a lot more.

 

[squarepush3r]

Quote from optioncoach:

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.

optionscoach, as i posted earlier its clear your broker has different requirements than mine, also your example does not make sense

Quote from spindr0:

Huh? Assuming OTM puts, if the margin requirement is 20% of the strike, do you really think that the premium received is going to exceed the margin requirement and increase your cash availability? Your cash is going to be tied up supporting your short put positions.

With all due respect, you should consider doing some serious reading before diving into the deep end of the pool. Based on your questions, your current understanding of margin and option strategies needs a lot of work and you're going to find that there's no water in the pool right now (grin)

spindr0, you were the one who posted earlier that

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

For an OTM naked put, that means that the margin requirement is 20% not 120%

also, commiebat said

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.

CALLS/PUTS (options in general) are not marginable securities, but stocks ARE.

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.

finally, from this, im gunna use the example of the actual chain i am looking at. So say the PUT is worth $4.85 (LDK Nov 40 PUTS)

$4.85 + 20% ($38 market underlying) - $2 (out of the money amount, 40 - 38) = $10,45 margin requirements

the $4.85 is credited to cash, so its actually a $5.6 dollar margin requirement, which is 115% of the value of the PUT .. compared to long CALLS/PUTS which are 100% market value (so, you pay a little extra due to the increased risk of naked calls)

 

[El OchoCinco]

So what you saying now is completely different than what you first started saying so hopefully you understand how the margin is calculated.

You first few posts were implying you can sell the put and buy a bunch of stock with the proceeds.

 

[squarepush3r]

Quote from optioncoach:

So what you saying now is completely different than what you first started saying so hopefully you understand how the margin is calculated.

You first few posts were implying you can sell the put and buy a bunch of stock with the proceeds.

thanks again for replying, well my first posts were me confused trying to figure out what is going on. Since then I hope I have come closer to understanding what is going on. Trust me, I haven't dared to even touch this on my real account since I am learning from the posts in the thread.

I am using this chart as my guage for naked short put info

im not sure how to compute the "In The Money" amount however .

 

[El OchoCinco]

Here is great tip.

Most brokers like IB let you set up an order and they show you the margin requirements before you can transmit the trade.

Do an order for 1 short put that you used in your example and see what the margin requirement is but just do not transmit the order.

 

[squarepush3r]

Quote from optioncoach:

Here is great tip.

Most brokers like IB let you set up an order and they show you the margin requirements before you can transmit the trade.

Do an order for 1 short put that you used in your example and see what the margin requirement is but just do not transmit the order.

ok, thanks ill try that and make sure not to click transmit

 

[Nanook]

Quote from optioncoach:

I cannot help you if you do not try to analyze what we said.

In his profile he states his occupation: QA Engineer
I wonder what the "QA" stands for?