45 lines
1.6 KiB
Plaintext
45 lines
1.6 KiB
Plaintext
Clrapter 2: Covered Call Writing 51
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Example 2: Recall that the net investment for the cash write was $20,380. A
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margin covered write requires less than half of the investment of a cash write when
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the margin rate (set by the Federal Reserve) is 50%. In a margin account, if one
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desires to remove the premium from the account, he may do so immediately provid
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ed that he has enough reserve equity in the account to cover the purchase of the
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stock. If he does so, his net investment would be equal to the debit balance calcula
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tion shown on the right in Table 2-8.
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TABLE 2-8.
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Net investment required-margin account.
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Stock cost $21,500
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Plus stock commissions + 320 Debit balance calculation:
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Net stock cost $21,820 Net stock cost $21,820
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Times margin rate X 50% Less equity - 10,910
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Equity required $10,910 Debit balance $10,910
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Less premiums received 1,500 (at 50% margin)
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Plus option commissions + 60
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Net margin investment $ 9,470
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Tables 2-9 to 2-12 illustrate the computation of returns from writing on margin.
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If one has already computed the cash returns, he can use method 2 most easily.
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Method 1 involves no prior profit calculations.
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TABLE 2-9.
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Return if exercised-margin account.
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Method 1 Method 2
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Stock sale proceeds
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Less stock commission
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Plus dividends
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$22,500 Net profit if exercised-cash $2,290
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+
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Less margin interest charges
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330
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500
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(10% on $10,910 for 6 months) - 545
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Less debit balance
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Less net margin investment
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Net profit-margin
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- 10,910
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- 9 470
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$ 1,745
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Less margin interest charges -
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Net profit if exercised
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margin
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$1,745 Return if exercised = $9 ,470 = 18.4%
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545
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$1,745 |