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I fed your position into Option-Vue with yesterday's closing prices.
According to Option-Vue, you'd pay $34,805 (stock price minus call premium).
This is the simple part. The software further indicates an initial margin of
$18,000 (gross) or $16,805 (net). My reading is that the customer would have
to put up this sum, too, but I may be wrong here. Perhaps Mr. Lothian can
In any case, the equivalent naked put position only requires a margin of
$5,000 at current prices which I hope you will agree is considerably less
than the stock price even without the margin for the calls, if any.
> -----Ursprüngliche Nachricht-----
> Von: cwest@xxxxxxxxxxxx [mailto:cwest@xxxxxxxxxxxx]
> Gesendet: Wednesday, January 16, 2002 17:21
> An: MikeSuesserott; Omegalist
> Betreff: RE: please critique this strategy
> 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
> 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
> 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
> covered) calls be different?
> -----Original Message-----
> 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
> 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
> risk analysis.
> 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.
> Michael Suesserott