What Happens If...

Quote from ajacobson:

With the exception of accounts eligible for portfolio margining ... option requirements are meant to avoid a margin call at exercise. So the minimums are set equal to the Reg T minimum for stock. The account has to be a margin account or a cash account with enough cash to secure the strike.
I believe the level 2 distinction refers to allowed strategies.
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Thanks, this cleared it up for me.
 
Quote from MTE:

To write options you need a margin account. If you don't have it then you cannot write options, even if they are cash secured puts, you still need a margin account.

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Unless I misunderstood you, I believe your ansswer is wrong. I sell naked PUT in my brokerage account which is linked to my 401K with Fidelity. I should have cash to buy the shares in case it goes against me. For example, if a stock is at $23, I can sell 10 PUT $20 if I have $20000 cash in my account.

Interesting thing is that I can not do Call spread. I can buy Call for a strike price but I can not sell call for higher striker price for the same month. I could not figure out the wisdom behind it. I am just guessing the reason is that:
If I have $5000 and buy deep in the money Call (for example the stock is at $50 and I buy $40 call ans sell $45 call and then if $45 call gets excecised before the expiry, I will not have money to buy hold the shares. The broker should excercise my $40 to clear the things but .....
 
Quote from MTE:

To write options you need a margin account. If you don't have it then you cannot write options, even if they are cash secured puts, you still need a margin account.

To answer you intial question, if you are assigned and don't have enough money to cover the assignement then your broker will issue you a margin call and you would then have to either deposit more cash or close out the position.
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a margin account is not required for cash secured puts.
 
Quote from hajimow:


Interesting thing is that I can not do Call spread. I can buy Call for a strike price but I can not sell call for higher striker price for the same month. I could not figure out the wisdom behind it. I am just guessing the reason is that:
If I have $5000 and buy deep in the money Call (for example the stock is at $50 and I buy $40 call ans sell $45 call and then if $45 call gets excecised before the expiry, I will not have money to buy hold the shares. The broker should excercise my $40 to clear the things but .....
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Cash is cash. That's why cash-secured puts are allowed, as well as covered calls (already put up the capital for the underlying stock).

Spreads are different, as the short option is covered by another option - the capital isn't put up yet, and there would be a margin call, which should be in a margin account. Also, index options must be excluded as they could never allow option spreads on OEX.
 
Optionsxpress offers spreads and cash covered puts in a cash account. The spreads can be American or European.

Also, even with American style options, if the short is assigned early in a debit spread, the long can be exercised immediately to cover the assignment, because it would have to be ITM.

For a credit spread in a cash account, you would need to maintain the maximum loss value for the spread in cash incase of assignment so that it can be covered immediately.

But both can be done in a cash account as long as they're fully paid for in advance.
 
So let's think about that. If you allow a spread in a cash account with no requirement what happens at expiration. Say I've sold the 90/85 put spread with just the spread requirement. Expiration Friday the stock closes at 89. Even if I could exercise the 85 it would be foolish. You don't find out you've been exercised until after the close and exercise would be throwing away money. Why sell at 85 when the market is at 89.
Exercise notice is after the close.

Nope can't be done.
 
Interesting, I see there are some problems, I'm not sure how they handle credit spreads at expiration, but here's the literature from optionsxpress.


The "Cash/Options" account will allow options trading, but only fully-paid-for options, like long calls or puts, cash secured puts, spreads, etc.

Minimum basic maintenance equity requirements:
-Threshold equity requirement of $2,000 in minimum account value applies to margin accounts engaging in leveraged transactions including short puts, short stock and stock purchases on margin.
-There is no threshold requirement for accounts engaging in spreads.

Debit Spreads: 100% of the debit amount upon initiating the transaction.

Credit Spreads: 100% of the difference between the strike prices multiplied by the number of contracts, credit from the proceeds included.
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