38 lines
2.9 KiB
Plaintext
38 lines
2.9 KiB
Plaintext
Gapter 5: Naked Call Writing 137
|
||
stock is trading at 50 and one sells an April 60 call naked, figuring that he will cover
|
||
the call if the stock rises to 60 ( that is, if the option becomes an in-the-money option).
|
||
He should set aside enough collateral to margin the position as if the stock were at
|
||
60 (even though the actual margin requirement will be smaller than that). If he
|
||
allows that extra collateral, then he will never be forced into a margin call at a stock
|
||
price prior to (that is, below) where he wanted to take follow-up action. Simply stat
|
||
ed, let the market take you out of a position, not a margin call.
|
||
THE PHILOSOPHY OF SELLING NAKED OPTIONS
|
||
The first and foremost question one must address when thinking about selling naked
|
||
options (or any strategy, for that matter) is: "Can I psychologically handle the thought
|
||
of naked options in my account?" Notice that the question does not have anything to
|
||
do with whether one has enough collateral or margin to sell calls (although that, too,
|
||
is important) nor does it ask how much money he will make. First, one must decide
|
||
if he can be comfortable with the risk of the strategy. Selling naked options means
|
||
that there is theoretically unlimited risk if the underlying instrument should make a
|
||
large, sudden, adverse move. It is one's attitude regarding that fact alone that deter
|
||
mines whether he should consider selling naked options. If one feels that he won't be
|
||
able to sleep at night, then he should not sell naked options, regardless of any profit
|
||
projections that might seem attractive.
|
||
If one feels that the psychological suitability aspect is not a roadblock, then he
|
||
can consider whether he has the financial wherewithal to write naked options. On the
|
||
surface, naked option margin requirements are not large (although in equity and
|
||
index options, they are larger than they were prior to the crash of 1987).
|
||
In general, one would prefer to let the naked options expire worthless, if at all
|
||
possible, without disturbing them, unless the underlying instrument makes a signifi
|
||
cant adverse move. So, out-of-the-money options are the usual choice for naked sell
|
||
ing. Then, in order to reduce ( or almost eliminate) the chance of a margin call, one
|
||
should set aside the margin requirement as if the underlying had already rrwved to
|
||
the strike price of the option sold. By allowing margin as if the underlying were
|
||
already at the strike, one will almost never experience a margin call before the under
|
||
lying price trades up to the strike price, at which time it is best to close the position
|
||
or to roll the call to another strike.
|
||
Thus, for naked equity call options, allow as collateral 20% of the highest naked
|
||
strike price. In this author's opinion, the biggest mistake a trader can make is to ini
|
||
tiate trades because of margin or taxes. Thus, by allowing the "maximum" margin,
|
||
one can make trading decisions based on what's happening in the market, as opposed
|
||
to reacting to a margin call from his broker. |