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Strategies & Market Trends : Options
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To: Poet who wrote (6065)4/5/2000 11:45:00 PM
From: PAL  Read Replies (4) of 8096
 
Hi Poet:

What I want to show is how to get out of a margin bind if you are selling put. As you know the margin requirements for selling puts are as follows:

The greater of

a) 25% of the underlying stock plus premium minus OTM amount
b) 10% of the underlying stock plus premium

When the stock is oversold you don't want to buy put options. The same is true that you don't want to close your short put in an oversold condition. But sometimes in a fickle time of the market, you might have to close your position to satisfy a margin call.

On the other hand, you know the stock is going to rebound. You want to keep a shortput position. What do you do?

I am giving an example to illustrate how to reduce the margin requirements (selling CC in not recommended because the stock is oversold):

Let just say you are short 10 April 110/JDSU puts. Each put is selling at $ 9/share. JDSU closed at 110.

Margin requirement 25% of 110 (closing price) + $ 9 (premium) - zero OTM = $ 36,500

____________________________________________________________

You are in a margin bind. You can close the position by buying back those ten contracts for $ 9,000, and immediately sell 10 June 90 JDSU puts which cost $ 9/share as well. Use the $ 9,000 proceeds from June options to buy back the April option.

Your margin requirement is now the greater of

a) 25% of 110 = 27.5 + 9 - OTM (110 closing price - 90) = $ 16.50
b) 10% of 110 + 9 premium = $ 20

Thus the new margin requirement is $ 20,000 vs the previous $ 36,500.

You still have 10 contracts short put on JDSU and now the strike price is $ 90 vs the previous $ 110.

The expiry date has been moved to June allowing us to ride out this market turbulence.

This roll out and down is better than covering the short put.

Maybe the above approach has been discussed in your Option Seminar and if that is the case, you certainly can explain it better than me.

Best regards

Paul
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