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I disagree with your calculation of the amount required to fund my example
trade. I checked with Bear Stearns and here are their comments and I've also
included the salient parts of Reg. T (which is used to guide the calculation
of margin amounts).
>From Bear Stearns....
As far as equity goes, you get 1:1 for fully paid securities, and 2:1 for
cash in buying power. Right now QQQ is trading around 40, so you'd need
just over $40,000 in fully paid securities or $20,000 to margin 1000 QQQ. I
say "over" to cover commissions.
There is no requirement for the calls if they are covered. You may not
"finance" the position by selling the calls first and using the proceed of
the sale for the purpose of buying the stock.
Reg. T Initial Margin Requirements: No requirement on option. 50% of market
value of underlying security if new position.
Maintenance Margin Requirements: No requirement on option. Requirement on
stock is 25% of the lower of strike price or market value.
My understanding and practice is that the credit from sold calls credits my
account and I can still leverage the stock that is used to cover the sold
calls. Isn't this different to what you say? And if so, then wouldn't the
profit factors in the example when comparing short puts and short (leveraged
covered) calls be different?
From: MikeSuesserott [mailto:MikeSuesserott@xxxxxxxxxxx]
Sent: Wednesday, January 16, 2002 5:02 AM
To: caw; Omegalist
Subject: please critique this strategy
we would have to include the QQQ price of about $40,000 in the calculation,
and add this to the $12,000 in margin for the short calls. None of this sum
of $52,000 would bear any interest, nor would there be any dividends, nor
could it be used as collateral for anything else if we want our short calls
to be covered. That money will be wholly tied-up in the position.
As regards early assignment, the problem is that assignment is an event over
which we have no control. Whether it increases or decreases the ROI depends
on a number of factors, most notably the price of QQQ at that time.
The delta aspect you mention will become totally moot the moment the QQQ
really tanks, a possibility that should not be ignored for a responsible
Regarding volatilities, it is erroneous to expect calls to have much less
volatility than puts in the case of a crash. Due to put-call parity, a type
of arbitrage is possible that will tend to keep these volatilities pretty
much in line with each other, temporary imbalances notwithstanding. Even
during the 1987 crash, call implied volatilities went up sky high.
And yes, the profit graph for the covered call position will be the same as
for the naked puts. We cannot simply discard one of the variables. If we
were to leave out the price of the stock from the calculation, we would not
be analyzing *covered* calls any more, but naked calls.
Hope this helps.