Polvie....Put Selling & Margin Requirements...
cboe.com
RISKS:
4. As with writing uncovered calls, the risk of writing put options is substantial. The writer of a put option bears a risk of loss if the value of the underlying interest declines below the exercise price, and such loss could be substantial if the decline is significant. The writer of a put bears the risk of a decline in the price of the underlying interest-potentially to zero.
A put writer of a physical delivery option who is assigned an exercise must purchase the underlying interest at the exercise price-which could be substantially greater than the current market price of the underlying interest- and a put writer of a cash-settled option must pay a cash settlement amount which reflects the decline in the value of the underlying interest below the exercise price.
Unless the put is a cash-secured put (discussed below), its writer is required to maintain margin with his brokerage firm. Moreover, the writer's purchase of the underlying interest upon being assigned an exercise of a physical delivery option may result in an additional margin call.
A requisite for writing puts is an understanding of the RISKS, the financial capacity and willingness to incur potentially substantial losses, and the liquidity to meet margin requirements and to buy the underlying interest, or to pay the cash settlement amount, in the event the option is exercised.
A writer of an American-style put can be assigned an exercise at any time during the life of the option until such time as he enters into a closing transaction with respect to the option. Since exercise will ordinarily occur only if the market price of the underlying interest is below the exercise price of the option, the put writer of a physical delivery option can expect to pay more for the underlying interest upon exercise than its then market value.
EXAMPLE: At a time when XYZ stock is $50, an investor receives a $300 premium ($3 a share) by writing an XYZ 50 put. Subsequently the stock price declines to $40 and he is assigned an exercise. The investor must purchase the stock at $50. Even though the $3 a share premium reduces his effective cost to $47, that is still substantially higher than the $40 market price of the stock.
The put writer's exposure to margin requirements can be eliminated if the put writer elects to deposit cash equal to the option exercise price with his brokerage firm. Under this strategy, known as cash-secured put writing, the option writer is not subject to any additional margin requirements regardless of what happens to the market value of the underlying interest. In the meantime, the option writer might earn interest by having the cash invested in a short-term debt instrument-for example, in a Treasury bill. However; a cash-secured put writer is still subject to a risk of loss if the value of the underlying interest declines.
EXAMPLE: An investor receives a $500 premium for writing an XYZ 50 put option with six months remaining until expiration and deposits with his broker $5,000 invested in Treasury bills which, over the six month option life, will earn interest of $250. If he has not been assigned an exercise by expiration, the investor will have a total return of $750 (option premium of $500 and interest of $250). On the other hand, if the price of XYZ stock were to fall below $42-1/2 and the investor is then assigned an exercise, he would have a net loss-that is, the market price of the XYZ stock he would be required to purchase would be below the exercise price by more than the combined premium income and interest earned.
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cboe.com
Edited for illustration.
Margin & Escrow Receipts
>>>Minimum Margin on Short, Uncovered Puts:
The minimum requirement is now calculated using the exercise price of the put rather than the current market value of the underlying.
Position: Short Put
Option Type: Equity
Cash Account Initial Requirement:
...Deposit cash or cash equivalents equal to aggregate exercise price or escrow agreement for a short put.
...Sale proceeds not released until deposit is made.
Margin Account Initial Requirement:
...100% of option proceeds plus 20% of underlying security less out-of-the-money amount, if any, to a minimum of option proceeds plus 10% of the put exercise price.
Margin Account Maintenance Requirement:
...100% of option market value plus 20% of underlying security less out-of-the-money amount, if any, to a minimum of option mkt. value plus 10% of the put exercise price.<<< |
