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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe)
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To: Howard R. Hansen who wrote (2078)6/11/2001 11:50:19 AM
From: Mathemagician  Read Replies (1) of 2241
 
I hope we are talking about the same thing. By a naked put I mean writing a put in an account in which there is insufficient cash in the account to buy an assigned stock. By a covered put I mean writing a put in an account in which there always will be sufficient cash to buy an assigned stock during the life of the put. Hence when you say "Why not maintain the required equity in cash?" you are saying you want to use the account to write covered puts. Yes, some brokers will let you do this in a non-margin account. But the only way a broker will let you write a put in an account in which there is insufficient cash in the account to buy an assigned stock is in a margin account. This is the same as saying you must use a margin account to write naked puts.

Good point. There is some inconsistency about whether having enough cash "counts" -- even within the same book. For example, the STC series 7 manual states both of the following:

"A put is considered covered if the writer is short the underlying securtiy or has cash in the account equal to the total exercise price."

"The writer of a put option who is also short the underlying stock is considered covered."

Maybe it's because most options traders don't make a habit of keeping that much cash in their accounts, but in my experience the latter case is assumed in conversation. :)

M
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