amein..."buying the underlying will tie up less funds..."
not really, buying the underlying always ties up more funds, due to the fact that you are "buying".....remember any long position reduces your capacity by at least one half, whereas any short put position is typically margined at about 20%.....
i'll ask pal to comment on this....assume you have $1m cash...this will easily allow you to purchase $2m of common stock on margin. if you were to sell the qcom 02200 @ 123, for 50 contracts, you would receive 615k of premium, add this to your 1m and you have a cash position of $1.615m....against this cash you have incurred an "economic obligation" of $1m should the qcom be assigned. you receive t-bill/money market against your cash, whereas if you went long 5k or 10k shares of common, you have either no return or a 1m margin debt, accruing interest....
if they intend on using the exercise price of the put, then you know going in what your margin requirement is for the duration of the contract, it provides a bit of safety, as it can prevent over leveraging in a strong uptrend.... |
