March was very good, now.........

Arnie Guitar

Arnie Guitar

Jan sucked, Feb was good, March was very good,
now I'm salivating with all the trading/writing ability I'll
have come Monday morning.
My hands were tied up for a while with all my margin used up,
but I'm free now.
Lotsa positions expired worthless.
I have a few April positions, and they're looking very good.
I'm debating if I should write more April positions,
or start working on May.
I don't like going out too far, so forget June,
although those are some decent premiums.......
My goal, not to tie up all my portfolio by taking all possible
positions first thing Monday morning!!:p
Patience, gotta find some patience.
Anyways, as you can probably tell, enthusiasm is high.
It's funny how I judge how $wise I'm doing by waiting for the
3rd Friday of the month.

Arnie
 
That's my biggest problem/fear.
I'm focusing on too few companies.
Not enough diversity.
It's very hard for me to find companies that meet my criteria.
I've got 19 companies on my watch list, and it's time to start
re-evaluating the ones that are on there, and maybe replacing them.
I like well known stocks with a history of increasing dividends,
and then writing OTM put and call options against them.
The problem is companies that have done that often
don't have enough volatility to create decent premiums in the options.
The daily volume is there, but not the volatility,
and you need some volatility to have a decent premium in the option, not too much, but some.
 
Thanks again to ChrisM for the post about buying an option at the next strike price down to free up some margin when selling naked puts.

I understand the common formula:
30% x Underlying - OTM amount + 100% of option premium = Margin Requirement;
for naked options.

How do you calculate how much the Margin Requirement would be reduced
by buying the next lower strike price when selling naked puts?

For example;
Underlying=82
April 80 put=1.00
April 75 put=.50

Using the common formula,
.3 x 80 =24
24 - 2 = 22
22 + 1 = 23/share
23 x 100 shares = $2300
So $2300/contract required for every naked April 80 put sold.

How does buying the April 75 put reduce that $2300?

Arnie
 
Arnie, what your doing is known as a bull put spread. Anyways, the margin reqs are strike price difference - credit receieved.
(80 -75) - (1 -0.5)
5 - 0.5 = 4.5 per spread or $450 per bull put spread.
If the broker claims otherwise, you need to switch broker.

Actually I reread my post before hitting reply, and that's what's at risk. You need to put up $500 margin per spread. $50 is what you get back, the $450s at risk. Why $500 margin? That's all you can lose (strike price difference - credit received).
 
Quote from Arnie Guitar:

Thanks again to ChrisM for the post about buying an option at the next strike price down to free up some margin when selling naked puts.

I understand the common formula:
30% x Underlying - OTM amount + 100% of option premium = Margin Requirement;
for naked options.

How do you calculate how much the Margin Requirement would be reduced
by buying the next lower strike price when selling naked puts?

For example;
Underlying=82
April 80 put=1.00
April 75 put=.50

Using the common formula,
.3 x 80 =24
24 - 2 = 22
22 + 1 = 23/share
23 x 100 shares = $2300
So $2300/contract required for every naked April 80 put sold.

How does buying the April 75 put reduce that $2300?

Arnie
More...

Arnie,

it`s pretty much as JJ said. Exchanges use sometimes complicated formulas (I know that CME used 16 patterns model) but most brokers use simplified formulas, based on risk.

For more see this:

http://www.interactivebrokers.com/e...s.phpmarginRequirements/stockIndexOptions.php

Also - come up sometimes to:

http://www.elitetrader.com/vb/showthread.php?s=&postid=1012467#post1012467

and

http://www.elitetrader.com/vb/showthread.php?s=&postid=1014047#post1014047

where Cache and Coach trade similar to yours positions and explain various techniques. It might be somewhat confusing, but be patient and follow what they are doing. Once understood it`ll give you great boost for your trading.
 
We need to separate the instruments here.

Options on Futures use SPAN margining, which is risk-based margining and, yes, CME uses complicated formulas.

Equity and Index options use rule-based margining. No complicated formulas here.
 
Quote from MTE:

We need to separate the instruments here.

Options on Futures use SPAN margining, which is risk-based margining and, yes, CME uses complicated formulas.

Equity and Index options use rule-based margining. No complicated formulas here.
More...


MTE,

thank you far clarifying this.
 
jj90, ChrisM, MTE,

Thank you all for taking the time to respond.
Your responses, explanations, and links were excellent.

I sincerely thank you for your help,

Arnie
 
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