Lynn, OT margin
From what I understand, the way put selling is calculated is actually due to math that should be changed, and hopefully will. It's as if the math doesn't care whether you sold or bought, it just calculates a differential. It's not "intuitive" math, it's abstract. In fact, the whole way the industry hold margin is a bit odd--they have THREE different formulas, and they take the one that holds the most margin at any given time--not sure this reflects real time risk either. Anyway, as your "play" gains--as your put deteriorates and the stock rises--you do not necessarily reap all the benefits, especially if you wrote it and used it for a stock that Fidelity is strict about (say, CMGI, with 80% requirement). They just use a formula that holds more margin (still not as much as originally when you wrote the put).
One can get annoyed, until one realizes that whomever thought up margin and writing puts was doing us a favor in the first place--free $!
Ed has said that writing puts avoids margin calls--we should probably ask him about this, because theoretically it doesn't...if you used the money to buy stocks that then dip on a volatile downtick, and too much was required to be held, you could be in a margin call. Which is why, when I looked at my account last week I decided to play it safe, in case DELL or MSFT crashed further (which MSFT mysteriously did). I guess the best you can do is look at the trading range for your stocks and try to get a sense of the worst possible future situation--and then leave some breathing room in your margin.
Some people like to buy stocks on margin, and writing puts could use up your capacity and irritate you. If you don't tend to buy on margin (I try not to), the capacity is sitting there and you might as well use it...Each to his own style, nonetheless a bit of caution is probably wise. (Or so I tell myself!)
Jill |
