One of the difficulties in calling Leaps markets is the capital treatment they attract. If I buy 100 Leaps for $5, assuming they are out-of-the-money, I am charged 100% margin, or $50,000 for the position. If they were warrants, they would be 50% marginable, so only a $25,000 capital charge, despite the fact that there cannot be a short squeeze on Leaps as often occurs with warrants and rights. (In point of fact, all options are margined this way, but the high time premium associated with Leaps makes the problem much worse from a ROI standpoint).
Interesting point about it not being possible for there to be a short squeeze on options. Makes sense, but I never put two and two together to figure that out.
But how does the absence of squeezes in options support your argument for similar margin treatment for LEAPS vs. warrants? (It seems to make sense to me to margin out-of-the-money options in a manner similar to OOTM warrants BTW, it's just that I don't see how arguing that a lack of potentially profitable short squeezes ought to suggest lower margin requirements)
I can see that you could use the un-squeezable nature of options to argue for more generous margin treatment when you are short OOTM calls, in comparison to being short OOTM warrants. Does this connect (in a margin arbitrage sort of way) back to what margin charge there "ought" to be for buying OOTM calls?
- Daniel |
