Long Call vs. Naked Short Put

[squarepush3r]

Quote from Nanook:

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

Quality Assurance

 

[commiebat]

Quote from squarepush3r:

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

An option is "at the money" when the stock price equals the strike price.

When the stock price is above the strike price by a certain amount, the call is in the money by that amount and the put is out of the money by that amount.

When the stock price is below the strike price by a certain amount, the call is out of the money by that amount and the put is in the money by that amount.

In other words, the ITM amount is the amount an option would be worth if it expired today.

 

[squarepush3r]

Quote from commiebat:

An option is "at the money" when the stock price equals the strike price.

When the stock price is above the strike price by a certain amount, the call is in the money by that amount and the put is out of the money by that amount.

When the stock price is below the strike price by a certain amount, the call is out of the money by that amount and the put is in the money by that amount.

In other words, the ITM amount is the amount an option would be worth if it expired today.

ahh, ok so for
PUTS, its the amount less than the strike
and for CALLS, amount greater than the strike

 

[spindr0]

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)

I'm not going to touch this one until you get your numbers right. The put is ITM. There is no out of the money amount.

FWIW, the margin req. is $1,245
Your SMA debit is $760

You cannot apply the $485 to your margin requirement AND spend it elsewhere

 

[squarepush3r]

Quote from spindr0:

I'm not going to touch this one until you get your numbers right. The put is ITM. There is no out of the money amount.

FWIW, the margin req. is $1,245
Your SMA debit is $760

You cannot apply the $485 to your margin requirement AND spend it elsewhere

wow, that is correct, so margin req' is 156% the value you sold the naked PUT at. Thats seems pretty hefty ... I'll defenitely play CALLS long on this trade, but now that I understand naked short puts, I can think of a few situations I might wanna use them on.

 

[El OchoCinco]

Quote from squarepush3r:

wow, that is correct, so margin req' is 156% the value you sold the naked PUT at. Thats seems pretty hefty ... I'll defenitely play CALLS long on this trade, but now that I understand naked short puts, I can think of a few situations I might wanna use them on.

Think about it, the risk is not the premium. Selling a $40 put means you are obligated to buy the stock for $4,000. that is the maximum true risk in the position so it makes sense that it would have some significant margin for being naked an obligation.

 

[Nanook]

Quote from squarepush3r:

Quality Assurance

Yes, I know. I wanted you to say it.

To learn option basics/terminology/structure read these books: <a href="http://www.amazon.com/Options-Strategic-Investment-Lawrence-McMillan/dp/0735201978/ref=pd_bbs_2/104-6624375-5290302?ie=UTF8&s=books&qid=1193434419&sr=8-2">
Options as a Strategic Investment</a>

Followed by: <a href="http://www.amazon.com/Option-Volatility-Pricing-Strategies-Techniques/dp/155738486X/ref=pd_bbs_sr_3/104-6624375-5290302?ie=UTF8&s=books&qid=1193434419&sr=8-3">
Option Volatility & Pricing: Advanced Trading Strategies and Techniques</a>
<p>
And/or see this website: <a href="http://www.theoptionsguide.com/">
The Options Guide