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Strategies & Market Trends : Margin Calls - Share The Pain
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To: daffodil who started this subject12/4/2000 8:12:10 PM
From: daffodil  Read Replies (1) of 158
 
Margin requirements on short straddles:

Straddles are easy once you understand the requirements for naked calls and puts.

For a straddle, you calculate separately the requirements on the call side and the put side. Don't forget to do the minimum calculation on the out-of-the-money side.

The requirement = the larger requirement PLUS the premium on the option from the opposite side. The most common mistake in calculating straddles is forgetting to add the opposite premium.

There is a great deal of logic to options margin calculations. For example, the naked calculation includes a subtraction if the options are out of the money. That's extremely logical (although the minimum calculation is onerous if the options are deep OTM).

What the straddle calculation is saying is, "we know you'll probably only be exercised on one side, but we want some protection in case you get whipsawed and exercised on both."

The only tricky thing about straddles comes into play if you have multiple positions for the same stock. For example, long the stock, short a call, short a put.

The general concept in calculating "hierarchy" is that your requirement will (for a change) be the lowest of the calculations that might apply.

So in this example, you would calculate the requirement for a [covered call + a short put] and for [long stock plus a short straddle] and the lower of the requirements would apply.
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