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Non-Tech : Waterhouse Securities
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To: James F. Hopkins who wrote (1288)4/29/1999 5:03:00 PM
From: rrufff  Read Replies (1) of 2076
 
Excellent discussion here on a difficult subject.

Couple of questions---

Writing (selling) puts -- How does it affect margin?

Example, sell 1 Put of XYZ strike 30 for 2 while XYZ stock is at 32.

1) My understanding is that the cash $200 (2x100) for selling the put reduces your margin debit. If no margin, then the cash goes to credit like cash reserves, etc.

2) Margin requirement - you are at risk that the stock will be put to you at 30 X 100 = 3000. However, you are 2 points out of the money and protected from immediate put.

is the margin requirement here initially (3000 - 200) X 1/2? =1400. Let say for discussion I put 2000 in the account, 1400 plus an extra 600.

By the way, I understand some brokers vary the percentage here - most require 1/2 but I think I read that some like Dreyfus or Brown only require 25%??? Or am I confusing the maintenance requirement with initial purchase requirement?

3) The put is now short and essentially is counted as a reduction in value of your portfolio.

So if you have nothing else in your account but you have 2200 in cash (2000 + the 200 from the put) and now -200 value of short put = 2000 portfolio value in your account. That gives you buying power for stock of 4000 less the (3000-200)of your exposure from #1 = 1200. This seems to make sense as you put in 600 more than the 1400 required in #1.

4) if the stock goes up, the value of the put goes down, increasing the value of your account and vice versa.

5) how is the buying power affected and calculated if the stock goes up (put goes down) and vice versa?

What percentage is used to compute the buying power in each case?

Thanks..
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