Newb question about margin required for naked puts

[Mikeinyvr]

Quote from dagnyt:

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

http://www.cboe.com/tradtool/mcalc/default.aspx


Well if I wanted to short 50 May 130 puts on MA ~ .30 and the underlying at 171 I'd need min $66,500 for a max profit of $1,500.


If I wanted to short 50 May 150 puts on MA ~ 2.00 and the underlying at 171 I'd need min $85,000 for a max profit of $10,000.

Seems like a lot of cash.

 

[cvds16]

no, it's you who doesn't realise what kind of underlying you're toying with ... :eek:

 

[cvds16]

better stay away from options, it seems you got no sense of risk !

 

[jwcapital]

Quote from Mikeinyvr:

http://www.cboe.com/tradtool/mcalc/default.aspx


Well if I wanted to short 50 May 130 puts on MA ~ .30 and the underlying at 171 I'd need min $66,500 for a max profit of $1,500.


If I wanted to short 50 May 150 puts on MA ~ 2.00 and the underlying at 171 I'd need min $85,000 for a max profit of $10,000.

Seems like a lot of cash.

Depends on the margin requirements of the individual broker. Your math is off a little. If you wish to cover the put completely with cash, your cash requirement is 50*100*130 or $650,000.00. Most brokers will require 50% of that or $325,000.00. Some like IB allow even less. This is shorting 50 May 130P. Your premium received is (based on .30) is $1,500.00. You must really want the stock to even consider this trade. I used to do these with biotech stocks. Got seriously burned about eight years ago. There was a company coming out with a prostate cancer drug..guaranteed to pass FDA muster. So, I placed a cash covered short OTM put the Monday before the announcement. The announcement was to occur Friday after the bell. Looked like a sure thing. Well, after the bell, the FDA announced that it was not approving this wonder-drug. As you can imagine, on Monday, the stock gapped down below my strike. For the first time, I received a margin call (remember those). Make a long story short, had to liquidate, and lost $10K.

 

[KINGOFSHORTS]

If your gonna go short puts why not do a credit spread?

I go short puts only on an underlying I am willing to have put to my account at a price I feel is adequate.

 

[Mikeinyvr]

Quote from cvds16:

better stay away from options, it seems you got no sense of risk !

My math is based on the minimum CBOE 20% - my broker is 25%. I understand the minimum margin requirements and also understand it can go up exponentially if the underlying sinks.

What risk am I not seeing. That the underlying may go to zero on a black swan event and I could lose everything. That risk? Sure I see that but I thought everyone knew that. Anything else?

 

[Mikeinyvr]

Quote from KINGOFSHORTS:

If your gonna go short puts why not do a credit spread?

I go short puts only on an underlying I am willing to have put to my account at a price I feel is adequate.

Or if the put is stupidly expensive as they can be and the iv off the chart; often prior to earnings. For this to work you are approaching shorting puts as a trader which seems is not a popular background for many of those who post here.

 

[Mikeinyvr]

Quote from jwcapital:

Depends on the margin If you wish to cover the put completely with cash, your cash requirement is 50*100*130 or $650,000.00.

I think we have a misunderstanding. When you sell to open a put position you can allow the put to expire worthless as long as the underlying stays above your put price. Where I come from "cover" means closing a short trade - do you mean "exercising" the put completely?

If May 150 puts are $2 when you short them and a week later those 150 puts are $1 you buy to cover and pocket the difference on the premium. You'd close the position - where does it say you need full value of the underlying to accomplish this?

 

[riskfreetrading]

Quote from Mikeinyvr:



What risk am I not seeing. That the underlying may go to zero on a black swan event and I could lose everything. That risk? Sure I see that but I thought everyone knew that. Anything else?

I think you have a better mind than some who advised you and lectured you. From the nature of your questions, I think that you have an intellectual edge to be a winner in options.

Here is a risk you may have not thought of? What if the stock does not move, and the option volatility rises very high? Take an option calculator, and check things out. You would be surprised.

I will comment later after you have run some numbers. Please share them here.
In addition, notice that there is no limit to the upside on implied volatility.

I have noticed a lack of understanding/appreciation/awareness for the question you have raised in a thread here that dealt with a similar question. Please search for it in history (last few months). I explained points related to margin on puts, and what people did not seem to grasp. Please include the link if and once you find it.

 

[dagnyt]

Quote from Mikeinyvr:

Where I come from "cover" means closing a short trade.

Yes, me too. But you are quibbling.

He did not say 'cover the position'

He said 'cover the position completely' and surely you must know he is referring to a different use of the word. He's talking about writing cash-secured puts.

This is not something worth an argument.

Mark