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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe) -- Ignore unavailable to you. Want to Upgrade?

To: Mathemagician who wrote (2084)	6/11/2001 12:18:54 PM
From: Mathemagician	Respond to of 2241

Good point. There is some inconsistency about whether having enough cash "counts" -- even within the same book. For example, the STC series 7 manual states both of the following: "A put is considered covered if the writer is short the underlying securtiy or has cash in the account equal to the total exercise price." "The writer of a put option who is also short the underlying stock is considered covered." Maybe it's because most options traders don't make a habit of keeping that much cash in their accounts, but in my experience the latter case is assumed in conversation. :) Addendum: The real reason the latter is assumed (and may well be correct) is that the former definition is inconsistent. To see this, Howard, Ken and I will each sell a put on the same security. Howard will cover his put with cash. Ken will cover his put with margin. I will cover mine by going short the underlying. In all cases our maximum gain is Howard's loss potential is limited to the strike minus the premium he collected on the put. So is Ken's, though Ken's may hurt a bit more due to his use of margin. However, my loss potential is unlimited due to the short position. Of course, a more glaring issue is that I am rooting for the price of the underlying to fall, while both Howard and Ken are rooting for it to rise. My position is a bearish strategy. Ken's and Howard's positions are bullish. As a result, it does not make any sense to lump Howard's position in with mine instead of Ken's. M P.S. Sorry for the slight breach of netiquette in replying to myself.