David,
I had bought the idea, however, that naked options were different because I thought they necessitated margin.
The term naked is most often used in connection with selling options without a covering position. Your original question was about buying options that had no covering position, and that is I think more commonly referred to as simply long calls or long puts. The statement above taken out of other context is usually understood to mean selling options. "Margin" is a term I find can be very confusing. Although it often conjures up the idea of borrowing something, it generally means the amount of your money that must be in place to hold a position (initial margin; maintenance margin). Yet we pay "margin interest" on the money we borrow in a margin account, not on the margin we are required to have in place. Similarly, writing an option is commonly referred to as "shorting" the option, but unlike shoring stock writing an option does not involve borrowing anything to open the position. You are simply entering a contract that may or may not require future action.
The problem comes in that writing an option creates the possibility of the need to borrow in the future. For long options, the auto exercise at expiration time we already talked about is the only way you can be forced to borrow anything, and that can only happen at a specific time. Selling naked options is a whole different story. Equity options are American style options that can be exercised by the option owner at any time. If you write (short) a put, at any time you might have to come up with the strike price in cash to cover an assignment. The enlightened broker responds by saying as long as you keep enough cash in the account cover that possibility, you can sell puts. (There is some debate over whether that is a "naked" put. Many define a covered put to be one where you have either the cash, or short stock to meet assignment. Cash backed puts are the only possibility for an IRA.) If you write a call, and do not have the stock to deliver in case of assignment you are liable to have to purchase stock at market at any time. Nobody can foretell the price you will have to pay for that stock, so there is no way to assure you have enough cash to cover it. So unlike the short put which has a known cost to meet assignment, the short call is an open ended liability that could force you into a situation where you would have to borrow money from the broker to deliver stock. No broker in their right minds is going to let you do this.
Dan |
