Newb question about margin required for naked puts

Quote from yip1997:

20% was a rough estimate. There is a formula for it. It changes with the stock price. margin requirement is not the same as your risk. Don't write naked options if you don't understand the risk.
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I forgot to mention that. The margin requirements changes on a daily price as the underlying PPS fluctuates.

Rather than thinking about all this premium you could take in by leverage/selling naked puts, you can very effectively and practically utilize this strategy as you would putting in a limit order to buy a stock at a lower price.

In other words, if you really liked Yahoo and think MSFT is gonna buy it this year, but dont wanna pay current market price. Say you want to pick up 300 shares and have the funds to do so. Than you could sell just 3 put contracts and at least make some money as opposed to just putting in a limit order to buy as the average person does.

But just to simply speculate and think that a stock price will behave in a certain manner while selling a boat load of puts is not the way to go. You might be write once or twice, but it will catch up with you. Remember, you are only as good as your last trade. At one point a while back, I blew out 3 years of gains because I was stubborn and kept increasing my exposure to the S&P 500 by writing more and more puts.
 
Quote from ItermBonds:


Trust me writing puts is not as easy as it seems on text or in a book. And many times, the unthinkable will happen to you. Remember leverage is a two way sword.
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Ah yes. Good ol' St Patty's day of 2008 and the BSC experience.

Being short Bear Stearns puts that Sunday night was NOT a good feeling. No sleep Sunday night, and drunk as a skunk Monday night after somehow surviving the day.

The unthinkable happens much more often than statistics would suggest.
 
I understand the risk far too well. But I also see the potential if managed properly. I'm interested in the meat and potatoes of fees associated with shorting a put which is why I chose that example of selling YHOO 14 puts.

I thought it would be a simple example where someone could say "yeah, well you'd need to have $xxx in your account to execute that trade".

But it seems that is not that simple - and for a question relating to fees it seems wrong we are on page 2 without a definitive answer.

For example from a brokerage:

"Naked Put Short Put Greater of these 3 values:

1. 100% of the option proceeds + (20% of the Underlying Market Value) - (OTM Value)

2. 100% of the option proceeds + (10% of the Strike Price x Multiplier x Contracts)

3. 100% of the option proceeds + ($250/contract)"
 
Quote from Mikeinyvr:

I understand the risk far too well. But I also see the potential if managed properly. I'm interested in the meat and potatoes of fees associated with shorting a put which is why I chose that example of selling YHOO 14 puts.

I thought it would be a simple example where someone could say "yeah, well you'd need to have $xxx in your account to execute that trade".

But it seems that is not that simple - and for a question relating to fees it seems wrong we are on page 2 without a definitive answer.

For example from a brokerage:

"Naked Put Short Put Greater of these 3 values:

1. 100% of the option proceeds + (20% of the Underlying Market Value) - (OTM Value)

2. 100% of the option proceeds + (10% of the Strike Price x Multiplier x Contracts)

3. 100% of the option proceeds + ($250/contract)"
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OK - broker dealers will vary and certain stocks void the guidelines above.

But assuming they did apply, for number 1 in addition to the premium you would need $140K, number 2 $70K, number 3 would be $125K. So looks like initially you would need $140K for your example.
 
Thanks itembonds and others; just covering my math. Appreciate your indulgence and cautions - absolutely agree this naked puts not for everyone. But if no one every came to America because of risk then this country would become the power it is.
 
Quote from Mikeinyvr:

if no one every came to America because of risk then this country would become the power it is.
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But that has nothing to do with taking intentional risk when betting the price of stocks.

You must understand how options work before you even think about trading them.

Margin is the least of your concerns right now. And if you really want to know, just call your broker and ask: If I sell 10 YHOO May 14 puts, what is the margin requirement? Ask if you can use the cash collected (premium) towards that requirement.

If you truly want to sell options on 50,000 shares, then ask about 500 puts instead of 10.

Mark
http://blog.mdwoptions.com/
 
Quote from dagnyt:

And if you really want to know, just call your broker and ask: If I sell 10 YHOO May 14 puts, what is the margin requirement?

Ask if you can use the cash collected (premium) towards that requirement.


Mark
http://blog.mdwoptions.com/
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At the current price of .44 for the May 14 put ~ the margin requirement for shorting 10 puts would be $3510.

And they do not use cash collected towards the requirement.
 
Clearly a lot of cash is required to short puts. Even in the example of YHOO, if you were shorting the May 14 puts at .45 ~ it looks like you would need $40,000 in your account to short 100 contracts.

14*100*100*.25 (25 % approx margin percentage requirement)=35,000

plus cost of the option .45*100*100 =4500


That is a fair chunk of cash for a maximum benefit of $4500.

But of course if you had millions it would be easier. Hedge fund anyone?
 
Quote from Mikeinyvr:

Clearly a lot of cash is required to short puts.
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That's silly.

When you short a put, you are accepting the obligation to buy 100 shares.

The margin on a put sale is much less than needed to buy those 100 shares. So why do you believe it takes 'a lot of cash' to short puts?

I think margin rates are far too low.

Mark
 
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