Naked put margin

C

chengas123

I want to understand when writing a naked put how much the price of the underlying would have to change in order to face a margin call.
I use Interactive Brokers. Do they have any type of margin simulation where I would be able to see how much margin is required under different conditions?
Assuming the best route is to calculate it manually, I'd like to post an example here and have my math double checked.

From the IB website:
Short Naked Put Index Options
Put Price + Maximum((15%[3] * Underlying Price - Out of the Money Amount), (10% * Strike Price))

Let's use a SPY put leap as an example:
http://finance.yahoo.com/q?s=SPY121222P00020000

It's trading at $.21 with a strike of $20 and the underlying trading at $110.

So would the formula be:
$21 + Maximum((.15 * $110 - $90), (10% * $20))
= $21 + Maximum(-$73.5, $2)
= $23

So I would need $2 to cover the margin in addition to the $21 generated by the sale of the option. Is that right?

IB tells me N/A for commission and margin if I preview an order (screenshot attached). Any idea what's up with that?
 
Quote from chengas123:
----I want to understand when writing a naked put.....
----an SPY put leap......
-----It's trading at $.21 with a strike of $20 and the underlying trading at $110.
----Any idea what's up with that?
More...
1) Nothing is up with that.
2) You're not supposed to short-sell, long-dated, deep-out-of-the-money options, EVER. They are only to be bought as a "lottery ticket". :)
 
I appreciate everyone's input on the trading strategy. I'm still interested in the answer to the original question to make sure I understand correctly the way that IB calculates margin even if you're not a fan of the example I picked :)

1) Nothing is up with that.
More...
What I mean is why is the commission and margin showing as N/A? Surely IB has to be charging a commission?
 
Quote from chengas123:
----Put Price + Maximum((15%[3] * Underlying Price - Out of the Money Amount), (10% * Strike Price))
----Let's use an SPY put leap....trading at $.21 with a strike of $20 and the underlying trading at $110.
----So would the formula be:
$21 + Maximum((.15 * $110 - $90), (10% * $20))
= $21 + Maximum(-$73.5, $2)
= $23
More...
1) ?....(0.15)(110-90) equals $3, not -73.5. :eek:
2) $21 + Maximum ($3, $2) equals $24. :p
 
The margin manual from CBOE margin requirement

The greater of these values for Broad Based Index:

100% option proceeds +
15% Underlying market value, less Out-of-the-Money if any.

or

100% Option proceeds +
10% Underlying market value or Puts Exercise price.

I can't speak for IB but every brokerage I've ever worked for also had a minimum of:
100% option proceeds +
$250 per contract.

The CBOE Margin Manual can be found in PDF @

www.cboe.com/tradtool/marginmanual2000.pdf
 
>> $21 + Maximum((.15 * $110 - $90) <<

Quote from nazzdack:

?....(0.15)(110-90) equals $3, not -73.5.
More...
Multiplication takes precedence over subtraction :)

Since the answer is negative, the maximum does not apply.
However, since the example is FUBAR, you can blame it on the OP

:D
 
Quote from chengas123:

From the IB website:

Short Naked Put Index Options
Put Price + Maximum((15%[3] * Underlying Price - Out of the Money Amount), (10% * Strike Price))

It's trading at $.21 with a strike of $20 and the underlying trading at $110.

So would the formula be:
$21 + Maximum((.15 * $110 - $90), (10% * $20))
= $21 + Maximum(-$73.5, $2)
= $23

So I would need $2 to cover the margin in addition to the $21 generated by the sale of the option. Is that right?
More...
If you're going to use $21 as the premium then you're going to have to use dollars in the rest of the calculation rather than pts. Doing it via pts, the correct calculation for the "maximum" would be:

.21 + Maximum((.15 * $110 - $90)
= .21 -$73.50,)

Since this is a negative number, the "maximum" does not apply and you then use the "minimum" calculation which is 10% of the strike plus the premium received or $2 +.21 for a margin requirement of $221. Since the premium can be used to reduce the margin requirement, the SMA debit amt is $200

Capiche?
 
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