37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
136 Part II: Call Option Strategies
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trading experience before the account can be approved for naked call writing. In
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addition, some brokers require that a maintenance requirement be applied against
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each option written naked. This requirement, sometimes called a kicker, is usually
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less than $250 per call and is generally used by the broker to ensure that, should the
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customer fail to respond to an assignment notice against his naked call, the commis
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sion costs for buying and selling the underlying stock would be defrayed.
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Naked Option Positions Are Marked to the Market Daily. This
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means that the collateral requirement for the position is recomputed daily, just as in
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the short sale of stock. The same margin formula that was described above is applied
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and, if the stock has risen far enough, the customer will be required to deposit addi
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tional collateral or close the position. The need for such a mark to market is obvious.
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If the underlying stock should rise, the brokerage firm must ensure that the customer
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has enough collateral to cover the eventuality of buying the stock in the open market
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and selling it at the striking price if an assignment notice should be received against
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the naked call. The mark to market works to the customer's favor if the stock falls in
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price. Excess collateral is then released back into the customer's margin account, and
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may be used for other purposes.
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It is important to realize that, in order to write a naked call, collateral is all that
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is required. No cash need be "invested" if one owns securities with sufficient collat
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eral loan value.
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Example: An investor owns 100 shares of a stock selling at $60 per share. This stock
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is worth $6,000. If the loan rate on stock is 50% of $6,000, this investor has a collat
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eral loan value equal to 50% of $6,000, or $3,000. This investor could write any of the
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naked calls in Table 5-2 without adding cash or securities to his account. Moreover,
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he would have satisfied a minimum equity requirement of at least $6,000, since his
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stock is equity.
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This aspect of naked call writing - using collateral value to finance the writing
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- is attractive to many investors, since one is able to write calls and bring in premi
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ums without disturbing his existing portfolio. Of course, if the stock underlying the
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naked call should rise too far in price, additional collateral may be called for by the
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broker because of the mark to market. Moreover, there is risk whether cash or col
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lateral is used. If one buys in a naked call at a loss, he will then be spending cash, cre
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ating a debit in his account.
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Regardless of how one finances a naked option position, it is generally a good
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idea to allow enough collateral so that the stock can move all the way to the point at
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which one would cover the option or take follow-up action. For example, suppose a |