is it true that buying back a short call in a covered call increases margin requirement? l thought it requires no margin to buy or buy back a call that is covered. I was long 100 shares of SQ with a covered call. I was in margin deficit with IB so tried to buy back the covered call, but it wouldn't allow it saying that it increased the margin deficit. I called IB and generally the staff are unhelpful at best. Got told couldn't buy back the covered call as it increases the margin requirement for the stock position? possible? and on me asking how i could increase my excess liquidity was told it was my responsibility to find. They did say l want to be more delta neutral, well buying back the call, would of made it more delta neutral, but disallowed. Buying back short stock wouldn't help either, as it increased margin deficit?! please explain
possible to increase your margin deficit buying back calls, used for covered call?
- Thread starter Sophie
- Start date
How would buying back a short call you have against long stock make you more delta neutral??? Margin usually comes from the broker stressing your book with whatever internal metrics they are comfortable with. Think of what the max loss figures on both sides are going to be with and without short otm calls. Maybe that will bring clarity.
Sophie, just to clarify what you hold;
A) short 100 shares and short 1call?
Or,
B) long 100 shares and short 1 call?
AFAICT Sophie is short stock and short call (so heavily short with no hedge).
Example 1:
Long 100 shares @ $20 each = $2,000
Short 1 call @ $3 = $300
Max. Loss = $1,700
Example 2:
Long 100 shares @ $20 each = $2,000
Max. Loss = $2,000
In the examples above, your max. loss increases if you close the short call position so your margin requirement increases.
If you don't want to reduce position size, close stock position and buy a DITM call to replace stock position. This will reduce margin requirements. You'll be left with a call spread if you hold the short call position. Or place 1 order to buy back call position and sell part of stock position to cover equity needed to buy call.
Closing just part of your stock position but holding the short call may increase margin as you'd have a partial naked call position.
With SQ trading around 71, you could buy the 60 Call for 11-13 so you'll reduce cash value from $7,100 to $1,100-1,300 minus short call value.
Long 100 shares @ $20 each = $2,000
Short 1 call @ $3 = $300
Max. Loss = $1,700
Example 2:
Long 100 shares @ $20 each = $2,000
Max. Loss = $2,000
In the examples above, your max. loss increases if you close the short call position so your margin requirement increases.
If you don't want to reduce position size, close stock position and buy a DITM call to replace stock position. This will reduce margin requirements. You'll be left with a call spread if you hold the short call position. Or place 1 order to buy back call position and sell part of stock position to cover equity needed to buy call.
Closing just part of your stock position but holding the short call may increase margin as you'd have a partial naked call position.
With SQ trading around 71, you could buy the 60 Call for 11-13 so you'll reduce cash value from $7,100 to $1,100-1,300 minus short call value.
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Robert Morse
Sponsor
Yes, that is correct as the short call was an offset.
QUOTE="Sophie, post: 5000809, member: 502262"]is it true that buying back a short call in a covered call increases margin requirement?[/QUOTE]
QUOTE="Sophie, post: 5000809, member: 502262"]is it true that buying back a short call in a covered call increases margin requirement?[/QUOTE]
Part of the confusion is that you initially wrote that "Buying back short stock wouldn't help either..."..
Good Luck...
The sold call may not matter here while your main problem seems to be the long stock, for which you may not have enough margin.
A different way to look at this may be that a covered call is equivalent to not having the shares and instead selling just a naked put at that same strike as your call. This in turn means you’d have to have enough cash (or equivalent margin) for being assigned shares.
Basically in both cases it comes out to the value of the shares being the problem, not the call. Buying the call back could be treated as a separate transaction and would require even more available margin.
A different way to look at this may be that a covered call is equivalent to not having the shares and instead selling just a naked put at that same strike as your call. This in turn means you’d have to have enough cash (or equivalent margin) for being assigned shares.
Basically in both cases it comes out to the value of the shares being the problem, not the call. Buying the call back could be treated as a separate transaction and would require even more available margin.
Since you’re not short stock then there is nothing to buy back. You’re long stock, so possibly selling some of your shares might help.
Or liquidate the whole position and buy less shares, which possibly can be done in a single transaction by buying the call back and selling some shares together.
For example try selling 25 shares together with buying that call back, as a combo.
(not sure I’ve got this right, while it may also depend on your cash situation which may require adding more cash)
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