margin requirements on uncovered calls

L

ljwobker

I'm new to this, so apologies if I get any of this wrong. I'm good at math and understand equity trading well enough, but I've started reading options and am still trying to learn all the lingo and various broker terms/rules. ;-)

So all that said: consider the following trade:

Long (qty 10) 50/45 put spread on XXYY : costs $0.75
Short (qty 10) 60/70 call spread on XXYY: collect $0.70
net premium cost for the trade is ($0.05 * 100 * 10) --> $50

max upside:
XXYY < $45 at expiration then: [(50-45)*100*10] --> +5,000

max risk:
If XXYY >$70, loss is [(70-60)*100*10] --> -10,000


So that part I'm relatively certain I follow. What is not entirely clear to me is what the margin requirements are for this trade. I found the following requirements on TDA's website for margin trades:

Margin requirements for uncovered equity options are the greater of:
a) 20% of the underlying stock, less the OTM amount, plus the mkt value of the options
b) for calls, 10% of the mkt value of the underlying, plus the premium value.
c) $50/contract + 100% of the premium

SO here's where I got lost. The only part that I'm "uncovered" on is the call spread, right? If the stock currently trades at $55, what is the margin requirement? And does that mean if this position is established that the interest on that amount will be charged beginning immediately? Or is interest only charged if the uncovered component moves into the money?

To meet the requirement, does that mean there has to be that much CASH in the account? Or does it mean that your "margin balance" has to be at least that much?

And is the margin requirement constantly recalculated as the underlying stock changes in value? Or only at the time the position is established?

Thanks for any help. ;-)
 
Quote from ljwobker:

I'm new to this, so apologies if I get any of this wrong. I'm good at math and understand equity trading well enough, but I've started reading options and am still trying to learn all the lingo and various broker terms/rules. ;-)

So all that said: consider the following trade:

Long (qty 10) 50/45 put spread on XXYY : costs $0.75
Short (qty 10) 60/70 call spread on XXYY: collect $0.70
net premium cost for the trade is ($0.05 * 100 * 10) --> $50

max upside:
XXYY < $45 at expiration then: [(50-45)*100*10] --> +5,000

max risk:
If XXYY >$70, loss is [(70-60)*100*10] --> -10,000


So that part I'm relatively certain I follow. What is not entirely clear to me is what the margin requirements are for this trade. I found the following requirements on TDA's website for margin trades:

Margin requirements for uncovered equity options are the greater of:
a) 20% of the underlying stock, less the OTM amount, plus the mkt value of the options
b) for calls, 10% of the mkt value of the underlying, plus the premium value.
c) $50/contract + 100% of the premium

SO here's where I got lost. The only part that I'm "uncovered" on is the call spread, right? If the stock currently trades at $55, what is the margin requirement? And does that mean if this position is established that the interest on that amount will be charged beginning immediately? Or is interest only charged if the uncovered component moves into the money?

To meet the requirement, does that mean there has to be that much CASH in the account? Or does it mean that your "margin balance" has to be at least that much?

And is the margin requirement constantly recalculated as the underlying stock changes in value? Or only at the time the position is established?

Thanks for any help. ;-)
More...

The requirements on the call Credit Spread is the point spread, just as you calculated your "max risk" or the -10,000 that would be the amount of cash you'd need to have in the account or the amount of excess equity you have to have if trading on margin. Margin interest would only be charged if your on margin.

As for the requirement being recalculated... In the case of the credit sperad, NO it's the spread value no matter what the underlying does. The "Max Risk" is the requirement. In the case of uncovered option requirements... Yes. The uncoverd option requirement is marked-to-market at least daily. An unfavorable market move could require additional margin. But again you only pay an interest charge if the brokerage firm is lending you money. Generally you will be required to keep at least 30% account equity. Some firms have a higher minimum requirement.
 
OK, so that mostly makes sense. If we look at the margin calculations described here, which component is the spread... we originally had:

a) 20% of the underlying stock, less the OTM amount, plus the mkt value of the options
b) for calls, 10% of the mkt value of the underlying, plus the premium value.
c) $50/contract + 100% of the premium

obviously (c) doesn't change... but for (a) and (b) does this mean that the "value of the underlying stock" is now treated as the spread (meaning the underlying is always limited to 10k in this example)?
 
Hmm I have a similar question. I guess this is a credit call spread.

Buy 10 Jan 2012 $60 calls
Sell 10 Jun 2011 $60 calls

I put it into http://www.optionsprofitcalculator.com and the max loss is 4050.
So quite simply the margin will be the max loss, 4050?

I tried putting it into IB Spreadtrader but being the weekend, the price data isn't working :(
 
Quote from promagma:

Hmm I have a similar question. I guess this is a credit call spread.

Buy 10 Jan 2012 $60 calls
Sell 10 Jun 2011 $60 calls

I put it into http://www.optionsprofitcalculator.com and the max loss is 4050. So quite simply the margin will be the max loss, 4050?
More...
It's a long call time spread aka a horizontal spread. The margin requirment is the cost of the spread which is also the maximum loss.
 
This trade has no Margin, this is a debt trade.
some firm would have house margin like Schwab $5000 or options house $2000 just to make a spread, but as I said the trade it self has no margin.

Now if you were to make a credit spread then the margin would the like this:

buy 1 june 146 call
sell 1 june 145 call
Margin= 146-145-credit received from the trade.


Quote from promagma:

Hmm I have a similar question. I guess this is a credit call spread.

Buy 10 Jan 2012 $60 calls
Sell 10 Jun 2011 $60 calls

I put it into http://www.optionsprofitcalculator.com and the max loss is 4050.
So quite simply the margin will be the max loss, 4050?

I tried putting it into IB Spreadtrader but being the weekend, the price data isn't working :(
More...
 
Quote from ljwobker:

OK, so that mostly makes sense. If we look at the margin calculations described here, which component is the spread... we originally had:

a) 20% of the underlying stock, less the OTM amount, plus the mkt value of the options
b) for calls, 10% of the mkt value of the underlying, plus the premium value.
c) $50/contract + 100% of the premium

obviously (c) doesn't change... but for (a) and (b) does this mean that the "value of the underlying stock" is now treated as the spread (meaning the underlying is always limited to 10k in this example)?
More...

Yes...in your example.

a) and b) Are the excgange margin requirements for Equity and Narrow Based Index options for short "Uncovered" positions.

c) would be the brokers minimum requirement. Many of the firms I have worked for have a $250/contract + 100% of the options current value.

You can search and download the (PDF) CBOE Margin Manual.

Now, is the case of spreads.

Debit Call spread.
Buy the 37.50 @ $1
Sell the 40 @ .25 for a net debit of .75
The short 40s are considered covered by the fact that your long the 37.50s. the maximum loss is the debit.

Credit call spread.
Buy the 40 @ .25
Sell the 37.50 @ $1, net credit .75
The short 37.50s are considered covered by the fact that your long the 40s . No matter how high the underlying goes if assigned on the short 37.50 you can exercise the 40 for a max loss of the spread 2.50 or $250
per.

As long as you have a offsetting long position that limits the risk (Put or Calls) of the short position a), b) and c) don't apply. The exchanges nor the house will have requirements greater than the maximum risk.
 
Quote from stoic:
As long as you have an offsetting long position that limits the risk (Put or Calls) of the short position a), b) and c) don't apply. The exchanges nor the house will have requirements greater than the maximum risk. [/B]
More...

Ok, that mostly makes sense. But isn't it possible that the spread (and thus the risk) could be large enough that the broker would want to use that in the calculation -- basically getting us back to the calculations from a) or b) above?
 
Quote from ljwobker:

Ok, that mostly makes sense. But isn't it possible that the spread (and thus the risk) could be large enough that the broker would want to use that in the calculation -- basically getting us back to the calculations from a) or b) above?
More...

calculations a) and b) are for uncovered positions only.

Ther could be a case where the short uncovered is so far out of the money that the requirement with a) or b) or c) would be smaller. but even with an 80 point spread, if the max risk is the spread the why require more.
 
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