Selling covered calls - Margin required for no reason

C

CashProfits

I am not aware if this type of issue below applies to all brokers who offer Options but if so I'de love to know.

I Established an account with Options House and when attempting to sell a COVERED call it tells me that I cannot do so without a margin account. Firstly I did not need margin for the amount of equity that was needed to establish the trade.

The trade was as follows...

The stock price I was attempting to sell a covered call on was at roughly $7.60

I wanted to SELL two calls at a $10 strike for $0.30 and then BUY two calls at $11 for $0.10

This trade above presents a max loss of $400 with a max gain of $40.

So my main question is why does a trade requiring an equity of roughly $1500 with a max loss of $400 on an account with a cash value of $5000 require margin to make a short covered call trade?

I am sure there is a "rule" as to why this is not possible so if someone could provide info on that I'de appreacite it.


I guess it's back to only trading Forex where I'm free to use any strategy I want without bogus requirements that have no backing as to why they stand in the first place.
 
Technically what you are trying to do is called a short call spread. I do not know the rules for option house but I can tell you about the broker I use:

It has nothing to do with having a 5000$ margin. Normally the 5000 is the minimum amount to open a margin account. Like I said I do not know about option house but with my broker you can only do option spreads with a margin account (regardless of the maximum loss on any particular position). Basically in the strict definition of trading, what you want to do is NOT a covered call and is considered an option strategy.

The logic behind it is sketchy for me but I think it has to do with the fact that with a margin account they will check you credit score and also they normally require that you be an "experienced" trader...

Anyway usually brokers have the same general rules about risk I would say so in order to do what you want to do you will need a margin account, I don't think you can weasel your way around it. Besides, why would you not prefer having a margin account (even if you don't use the margin) simply because it allows you more trading freedom...
 
Quote from CashProfits:

I Established an account with Options House and when attempting to sell a COVERED call it tells me that I cannot do so without a margin account. Firstly I did not need margin for the amount of equity that was needed to establish the trade. The stock price I was attempting to sell a covered call on was at roughly $7.60

I wanted to SELL two calls at a $10 strike for $0.30 and then BUY two calls at $11 for $0.10

This trade above presents a max loss of $400 with a max gain of $40.

So my main question is why does a trade requiring an equity of roughly $1500 with a max loss of $400 on an account with a cash value of $5000 require margin to make a short covered call trade?
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It's not a short covered call trade. It's selling two bearish call spreads. It has a margin requirement and therefore it can't be don't in a cash account. You P&L numbers are 40/160 not 40/400
 
Quote from heiasafari:

The logic behind it is sketchy for me but I think it has to do with the fact that with a margin account they will check you credit score and also they normally require that you be an "experienced" trader...

Anyway usually brokers have the same general rules about risk I would say so in order to do what you want to do you will need a margin account, I don't think you can weasel your way around it. Besides, why would you not prefer having a margin account (even if you don't use the margin) simply because it allows you more trading freedom...
More...
The short answer is that the only thing that you can do with options in a cash account is buy them long or sell covered calls. Anything else requires a margin account.
 
oh really?

I stand corrected....

When I inquired about Covered calls to TD Waterhouse in 2007, they told me i needed a margin account. Maybe they changed their rules.
 
Yes, the spread requires margin. If you were "legging in " in the order you described, initially the margin for the 2 naked calls would be greater than the spread margin.

A similar debit spread should not require margin.
 
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