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Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (51111)	11/19/1999 6:04:00 PM
From: RoseCampion	Read Replies (7) \| Respond to of 152472

How, why, and where of short put margin requirments (longish): Rose, when you sell puts, do you sell outof money puts? if so, do you need to post margin? if sell barely inmoney puts, do you need to post margin? if not, and if they become outofmoney puts, do you then have to post margin? JWCB, unfortunately, with short puts, you always need margin. Lots of it. And then some more, it seems. ITM or OTM, doesn't matter much. Example (using Fido's requirements, no experience have I elsewhere): say you wanted to write 10 contracts of Q Jan00 400s, today selling for about 70 with Q @ 366. You'd get $70K in the bank immediately, but have to post margin of: 30% of stock price + premium (30% x 366) + $70K = $110K + 70K = $180K So you'd need at least $110K additional cash, or ~$200K of marginable shares, to collateralize this sale. (Actually, probably add at least $10K more as a brokerage "kicker" of $10K on the first 10 short positions in an account, so actual necessary total at Fido is $120K.) Still, not bad for two month's gain of $70K, you've gotta admit. Now you might think that as Q rises, and the puts get more worthless, they'd give you a big break. Nope. Say Q goes to 450 in a few weeks, so your puts are happily 50 points OTM. They're almost certain to expire worthless, but you'll still need: 30% of stock price - ITM amount + current premium (30% x 450) - 1000x50 + $20K(est) = $150K - $50K + $20K = $120K Gee, that didn't improve the picture all that much, did it? But it gets worse. Say the puts are nearly worthless, but you don't want to close them for tax reasons (see tale below). And the stock zooms upward on you. You'd think the ITM amount would get so large it would wipe out the 30% factor and the margin requirements would go to near zero, right? That would make sense. But it's not the way Mr. Broker sees it. You hit their "absolute minimum" rule at some point, which at Fido is $1k/contract, or 15% of the stock price, whichever is more. So if Q goes to 600, you have a completely worthless put, but it's now soaking up: 15% of stock price + premium (15%x600) + $.1K(est) = $90.1K This isn't academic; it actually happened to me when we went from ~200 -> ~400 a few days ago and I was still trying to hold onto a bunch of short 160 puts (written during that infamous dip to 150 in September) until January (to defer the tax gains). The puts were worth about fifty cents each, but they were soaking up better than $80k in margin in my account. (I dealt with it by hedging them, even though that required BUYING puts. Yecch.) The interested, or masochistic, can find a better description at: Message 11983719 -- So to answer your original question (back there somewhere), since my taxable account is mostly in LEAPs and DIM calls, which don't provide margin collateral, I can't take advantage of writing puts to even 10% of the extent I'd like to. So I have pick my times carefully, selling mostly ATM puts during major dips and hoping to be able to cover them quickly. The short-term gains rack up quickly this way if I guess right, but unfortunately so does Uncle Sam's cut of it. If I was a double Quillionaire living in a high-tax state I might want to consider writing LEAPS puts just to get LTCG treatment. thanks, just thinking and planning would like to take some fool's money Nothing, *nothing* has convinced me of the truth of the dictum "it takes money to make money" like writing puts. It's a great, low risk strategy to make considerable sums on a stock you wouldn't mind having put to you anyways. But clearly it's a game best played by the Quills amongst us. -Rose- PS: others can chime in here if they are sure they intimately know the vagaries of their brokerage's margin requirements for puts, and they're radically different than Fidos (in which case I'd love to open an account there).