Hi Poet and Jill:
More on margin call: don't feel bad. Even the very experienced people have to face this problem. To lessen the pain, consider using the Minimax approach.
Remember the margin formula for selling puts: there are three components
25% of the underlying stock (a) + premium (b) - OTM (c)
For simplicity consider the case that option is now ITM. so that you are left with 2 components: (a) and (b).
If you have 4 contracts then you have 4 X ( a + b ) = 4a + 4b margin requirements.
Look at all the option premium further down the month and even at higher strike price (including LEAP), you find a premium which has the value c where c is = 4b.
What do you do? Close your original 4 contracts, which releases margin requirement of 4a + 4b, and sell 1 put option which has the premium c. Remember c = 4b, which means that you use the proceeds of c to buy back 4b. Since you only have one contract, then the margin requirement is
1 x (a + c) = a + c. The difference with previous margin requirement is (4a + 4b) - (a + c) = 3a, which is 3 times 25% of the underlying stock price. (remember 4b = c).
Check all the alternatives above, you don't have to have a ratio of 4:1, could be 3:1 or 5:1, and consider the consequences (strike price and expriration). Then use Minimax approach to choose the best suited for you.
Why does this approach work? Simply because short put margin requirement formula is the same whether it is 5 points ITM or 50 points ITM.
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You refine further by choosing a replacement option which is OTM.
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Poet: did you repair you QCOM 140 CC with QCOM 160 CC when you wanted to keep your QCOM shares. If you did, it seems you might get your wish of hanging on the stock.
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To all newbies: The sell side of option is not for everyone, and if you want to undertake this strategy, make sure that you are not extended, have the capacity to be assigned and know all the repair methods, which incidently not necessarily discussed in books about options.
Good Luck and have Chi Chi on me.
Paul |
