Calculation of margin on naked call options
This is really simple once you get the hang of it. For one thing, initial and maintenance margin on naked options are the same,
which makes it easy. The basic formula is:
The options premium
plus a % of the underlying stock value
minus the amount of $ out of the money
Subject to a minimum requirement of
The options premium
plus a % of the underlying stock value
In the examples that follow, I'll use the NYSE/NASD requirements, which are 20% of the underlying stock value,
with a 10% minimum requirement. Many firms use these same requirements.
As far as I know, all firms, even those with higher requirements, use the same basic type of formula.
So, instead of the NYSE "20%/10%," they might use "30%/15%."
So, to sell naked 10 January 30 calls in the money ("ITM")with the stock at 40, for a premium of 12:
The options premium = $12,000
+ 20% of the underlying stock value of $40,000 = $ 8,000
- amount out of the money = $ 0
______
Requirement $20,000
Subject to a minimum of:
The options premium = $12,000
+ 10% of the underlying stock value $ 4,000
_______
Requirement $16,000
therefore, the $20,000 requirement will apply for initial margin.
To write 10 January 50 calls OTM with the stock at $40 for a premium of 2:
Options premium $2,000
+20% of stock $8,000
- amount OTM ($10,000)
_________
Requirement $ 0
Subject to minimum calculation:
Options premium $2,000
+10% of stock $4,000
________
Requirement $6,000
Therefore, the $6,000 requirement will apply.
Note that the minimum calculation will usually be higher when the option is out of the money; therefore, it is extremely important not to forget to do the minimum calculation!
Two things are important:
1) In writing the call and calculating the initial margin requirement, you use the actual call premium from the sale, but last night's closing price on the stock to determine the underlying stock value amount.
2) For calculating the maintenance requirement after the initial transaction, you use the previous day's closing prices for both the premium and the underlying stock. |
