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Strategies & Market Trends : Options -- Ignore unavailable to you. Want to Upgrade?

To: codawg who wrote (611)	1/3/2000 9:19:00 PM
From: taxman	Read Replies (1) \| Respond to of 8096

i'm not a regulation t expert but on what i've seen so far i agree with you first paragraph. If you have $100k worth of MSFT in your margin account and no cash you could buy up to $100k of CSCO. however i do not agree with paragraph 2. to me that is the same as saying that if you buy csco in the morning for 100 and it doubles to 200 by the close, you are entitled to a free ride. as i have said previously, under regulation t, you cannot borrow more than 50% of the purchase price which is the exercise price in the case of an option exercise. in any event i called the federal reserve in san francisco and they promised call me back to let me know how regulation t would apply to option exercise. regards bizwizbang.com

To: codawg who wrote (611)	1/5/2000 3:44:00 PM
From: SecularBull	Respond to of 8096

Don't forget that when you exercise options, you are converting unmarginable assets (options) to marginable assets (equity). Margin buying power is reduced in the transaction only if the debt-to-equity ratio is increased. For instance, if you bought a 10 calls with a strike of $20, and the stock was trading at $30 when exercised, you'd have to come up with an additional $20,000 to own a $30,000 position. If the equity in your account, with a $10,000 margin balance, was valued at $100,000 prior to exercising, you'd have to draw down $20,000 in margin to increase your equity position to $130,000. Your debt to equity would go from 1:10 to 1:4.3. Your remaining buying power would increase by ~$15,000 from before (because of the additional equity). However, let's say that the same equity was trading at $200, and you exercised at $20. You'd incur the same margin tap of $20,000, but you'd increase your equity to $300,000. Your debt to equity would stay at 1:10 ($30,000 margin:$300,000 in equity). Buying power would be increased by ~$100,000. Now, we wish all of out options exercises were like #2... LoD