risk of naked options

[JECIII]

Do initial margin requirements pertain to when you write a naked option, say the Euro, OTM. then the market moves to make it ITM, say by 50 points. When the buyer exercises, will you have to pay just the stated initial margin requirement or that plus the 50 points?

I am asking this because with a stock, if it moves from 20 to 25, it costs more. If the euro moves from 1.2 to 1.21, it still costs the same. Thus, their shouldn't be unlimited risk to a naked option, just the 2835 initial margin.

 

[MajorUrsa]

Quote from JECIII:
Do initial margin requirements pertain to when you write a naked option, say the Euro, OTM. then the market moves to make it ITM, say by 50 points. When the buyer exercises, will you have to pay just the stated initial margin requirement or that plus the 50 points?

On excersize you pay to the buyer the actual intrinsic value of the ITM option, which is the difference between the strike and the current price of the underlying.
The margin is just a kind of deposit to your broker that forms a kind of buffer for negative outcomes. It's size is calculated based on the risk of a certain outcome. When the option gets more and more ITM the margin requirement will rise. It has no direct relation to the exercise/intrinsic value of the option.

Ursa..

 

[ImamicPH]

Quote from JECIII:



If the euro moves from 1.2 to 1.21, it still costs the same.

huh?

 

[gkishot]

What are the margin requirements for naked options on futures. I am not looking for an exact number just an estimate percentwise - about 2% of position, 5% or as high as 20%?

 

[MajorUrsa]

Quote from gkishot:
What are the margin requirements for naked options on futures. I am not looking for an exact number just an estimate percentwise - about 2% of position, 5% or as high as 20%?

Around 10% for an averagely volatile index-future.

Ursa..

 

[FullyArticulate]

It all depends on what SPAN computes your margin as, which is very nonobvious.

For short options, I've been using:
MAX(Delta*2*Underlying_Margin,Underlying_Margin)

In other words, if your delta is .1, you'll probably have a 20% of the underlying's margin.

All this changes if you have any hedges.

 

[gkishot]

Quote from FullyArticulate:

It all depends on what SPAN computes your margin as, which is very nonobvious.

For short options, I've been using:
MAX(Delta*2*Underlying_Margin,Underlying_Margin)

In other words, if your delta is .1, you'll probably have a 20% of the underlying's margin.

All this changes if you have any hedges.

Got it. This is good one.

 

[FullyArticulate]

Quote from FullyArticulate:

MAX(Delta*2*Underlying_Margin,Underlying_Margin)

Oops, that should be MIN, not MAX

(i.e. the margin cannot exceed the underlying's)

 

[jessie]

Just to clarify, as it sounds like there might be some confusion; your margin requirement when trading futures has nothing to do with your risk. It is just a "surety bond" in a sense to help ensure that you will be able to meet any potential losses. You are liable for the full losses your positions incur, NOT just your margin. There is also no guarantee that in a fast market your stops will get you out at any predetermined level, and you, not your broker or anyone else is liable for the full amount of those losses due to gaps or fast markets as well.
Jessie

 

[FullyArticulate]

The OP may be confused by that.

Just to give you an example of how I got beaten up this week...

I sold wheat 480 calls about 2 weeks ago for 2.50. Yesterday, those calls closed at 54.00, and there's still 6 weeks to go before expiration.

I made a variety of adjustments to hedge my position, but still, I lost $2500/option contract for those calls.

My margin never exceeded about $1200/option.