Selling Naked Options

S

Stoxtrader

Hello options traders!

For margin requirements on naked options, I found this thread:
http://www.elitetrader.com/vb/showthread.php?threadid=148820

Here are the rules for InteractiveBrokers:

"100% * option market value + maximum ((20% * underlying market value - out of the money amount), (10% * underlying market value), ($2.50 * multiplier * number of contracts)). 20% above is 15% for broad based index options. Short sale proceeds are applied to cash. Not allowed for IRA accounts."
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Am I reading that right? For a single (1) naked $3 contract (100 shares) with strike price of $75 on an $80 stock, margin requirements would be $3 + max(20% * ($80 - $75), 10% * $80, $2.50 * multiplier * 1)... so $3 + $10... so $13 per $3 contract? So one would need $16 per $3 contract when selling naked options? And then more if the underlying went further from the strike price?

I'm really far away from trading options live. However since my main strategy is to be both long and short different markets, I want to start looking into combining put and call options.

Deterrents are the huge bid-ask spread and the huge margin requirements. I hoped selling both naked puts and naked calls would minimize the margin requirements, as in, the options would cancel each other out. Apparently not. Are there any creative ways of minimizing the margin requirements?
 
>> Am I reading that right? <<

NO. The margin would be:

= $3 + (20% * $80) - $5

= $3 + $16 -$5 less the $3 premium received = $11


Doing vertical spreads "may" reduce the margin (depends on the distance b/t strikes but the trade off is lower potential profit with bonus points for reduced risk
 
Quote from Stoxtrader:
Are there any creative ways of minimizing the margin requirements?
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Buy protection, limit your risk. (spread trade)
Selling Naked can help you acquire or sell stock.

I have heard Naked Selling can make very good money 98% of the time.
The remaining 2% can wipe you out and completely change your future. (The Black Swan)

Carl
 
I would ask my broker how he computes the value of the put for margin needs, and whether the margin number can be more than the broker needs for the same put in a cash account. I would take the answer, and keep it as a document in case it is needed in a future dispute.
 
Make sure you understand what you are doing. The term Naked options came from the big options seller wipeout that caused a bunch of options sellers to end up naked with nothing but a barrel and suspenders for clothing, since everything else had to be sold to meet margin.

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Forget about margin, which can fluctuate wildly from day to day. Figure out how much you could lose in a worst case scenario, then decide whether you like the trade. Your margin is *not* the maximum amount you can lose.
 
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