Question about the naked puts selling with leverage

K

Kust

Let's say I have $100 on my broker's account. There is some asset that costs $100 per one unit. I'd like to sell four deep OTM puts with a strike price of $50. Currently, I can do it, no problem, because the market situation is calm. I see in my account that my purchasing power is over $600.

Suppose we have a significant crisis and the asset price drops to, say, $41 per unit. There are still several months before the expiry date of the options. Due to the volatility spike, the price of each option is $9 + some enormous premium. I still have $100 cash in my account plus the small premium collected previously.

Will the broker allow all my options to live and be exercised? Or will some of them be forcibly bought back with a significant loss? In other words, is it acceptable to have a 2:1 leverage during a notable crisis?

My logic is as follows. Let's say the price of an asset drops from $100 to $50. It is a once-in-a-lifetime sale, and I should buy it. Even if the price drops to $40, I'll have temporary 40% paper losses, but it's OK. I hope that the crisis will end someday, and the price of the asset will go up. In such a situation, I would buy with 2:1 leverage if allowed.

However, if the price drops to $30 and below, it means a different situation. Probably paper wealth no longer matters. For example, it could be total war and anarchy. In such a case, I would not be upset if the broker forcibly liquidates my positions. Even if my account net worth drops to zero, it's OK. Only my shooting skills will matter.

I did not observe the situation in 2006-2008, as well as February-March 2020. I don't know how much the margin requirements grow in such cases. Is it acceptable to have a 2:1 leverage during such a crisis?
 
Kust said:
My logic is as follows. Let's say the price of an asset drops from $100 to $50. It is a once-in-a-lifetime sale, and I should buy it.
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The problem with your logic - and with the strategy of selling leveraged puts - is that you're anticipating the possibility of a future event based on present knowledge.

Right now you may think you can live with taking a 50% loss in XYZ. But that may not be the case when it happens. But you're already made your decision, and you're stuck with it.

Not a pleasant place to be.
 
Kust said:
Let's say I have $100 on my broker's account. There is some asset that costs $100 per one unit. I'd like to sell four deep OTM puts with a strike price of $50. Currently, I can do it, no problem, because the market situation is calm. I see in my account that my purchasing power is over $600.

Suppose we have a significant crisis and the asset price drops to, say, $41 per unit. There are still several months before the expiry date of the options. Due to the volatility spike, the price of each option is $9 + some enormous premium. I still have $100 cash in my account plus the small premium collected previously.

Will the broker allow all my options to live and be exercised? Or will some of them be forcibly bought back with a significant loss? In other words, is it acceptable to have a 2:1 leverage during a notable crisis?

My logic is as follows. Let's say the price of an asset drops from $100 to $50. It is a once-in-a-lifetime sale, and I should buy it. Even if the price drops to $40, I'll have temporary 40% paper losses, but it's OK. I hope that the crisis will end someday, and the price of the asset will go up. In such a situation, I would buy with 2:1 leverage if allowed.

However, if the price drops to $30 and below, it means a different situation. Probably paper wealth no longer matters. For example, it could be total war and anarchy. In such a case, I would not be upset if the broker forcibly liquidates my positions. Even if my account net worth drops to zero, it's OK. Only my shooting skills will matter.

I did not observe the situation in 2006-2008, as well as February-March 2020. I don't know how much the margin requirements grow in such cases. Is it acceptable to have a 2:1 leverage during such a crisis?
More...

Leverage can change at any time, without much notice.
100$ account??
I assume you mean shares when you say units, 100$ per share. 4x options are 400 shares. 4x Otm put at 50$ have a nominal value of 20k (100x4x50).

I don't think the broker would let you do the trade if you are really have a 100$ account and it's not a typo. The thing would blow up in a few seconds...
 
No one has given a clear solution for you but I went through this shit inside out so I'll save some hassle for you with bittersweet news.

Simple answer is that no one knows. Very few may know if they understand SPAN calculator offered by the CME exchange, but it's quite complicated because there are too many variables. How far is your strike price? Expiration date? What is delta? How volatile the market is according to CME? How much more margin requirement does your broker wanna add as insurance? And good luck finding that out; brokers consider their own internal marginal requirement a proprietary information so they will never tell you. They will simply say try to order it and it will give you how much your margin will be impacted before you confirm the trade order.

In general, I would not recommend flirting with option contracts unless you really know what you're doing or you are being advised by someone who has solid track record of doing it IRL. Leveraged complex securities can be quite punishing to people who donno what they are doing because just as potential profits are highly pronounced, so is the mistakes/losses.

And yes, naked short on calls/puts can be very capital intensive due to margin requirement and whatnot. I should know. I use nearly 7 figure capital to do this every freaken day haha. It can be quite lucrative, but you gotta put a lot of pieces together right, understand how the exchange/rules work, and ensure you have a solid system when your strategy fails because once in a while... it will. I paid a lot to learn this lesson.
 
lindq said:
Right now you may think you can live with taking a 50% loss in XYZ. But that may not be the case when it happens.
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I think I can handle it. This applies to assets with robust dividends and sectors I'm long-term bullish about.
 
traider said:
What about naked call selling? How is the margin calculated?
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Selling naked calls is inherently bad idea.
If you feel yourself to be the smartest kid in the group, sell call spreads. I would avoid it.
 
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