[azmike]

This post is addressed to everyone. All comments are welcome.

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I think it would be very important to define what use of margin is, because investors explain it in different ways. If you ask more questions, you would see a clear difference.

Please correct me if I am wrong.

For example, using rough numbers:

1. Cash in the account $100K and no positions of any kind = zero margin use.

2. Cash in the account $100K and 5 naked puts at $100 strike ($50K cash secured position) = about 15K of maintenance margin.

3. Cash in the account $100K and 20 put spreads, $20 wide with the short put strike at $100 = $40K of maintenance margin.
However, in the worst case scenario, if the short puts are assigned, the cash required would be $200K, resulting in a margin call. The long puts will help a bit, but if they expire out of money, you still need $200K in cash

4. For those who are holding long stock, credit spreads and short puts/calls in the same margin account, the calculation of margin and required cash to cover positions would be completely different.

So when someone says that they are using 30% or 50% of margin, I think those numbers do not mean much, because we do not know the content of the account.

It would be good to know what stands behind the 30% margin use.

– Is it 30% of the available cash?

– Is it 130% of the available cash? So 30% is being borrowed on margin.

– Is it just a number from your broker specified as maintenance margin?
That can change at any time due to price movement.

I was told that calculating the amount of cash needed to cover all positions would be a more important number.

So, are you utilizing 30%, 50%, 100% or 130% of the available capital in your regular trading?

[azmike]

You have to keep in mind that it may not be possible to roll the spreads out without widening the strikes and adding risk.

Yes, you do get a reduction in capital requirement, and it definitely helps in a normal market. But when panic occurs, then rolling becomes very difficult.

You must have sufficient capital for:
1. rolling with wider strikes
2. for accepting shares on the short puts, even if only for a few days or weeks.

Minor correction is not a problem for credit spreads, but in a market experiencing panic selling, having no capital to cover the short puts = full loss on the spread or a margin call.

You only need to experience this once to remember it for a very long time.

[azmike]

The way I understand this approach is that those long puts are used as an insurance in case of a catastrophic decline in the stock price.

[azmike]

Hello Teddi,

Any update on this one?
A brief explanation would be just fine.

Thanks,
Mike

[azmike]

OK. I will keep checking.

Thank you.
Mike

[azmike]

Hello Teddi,

Have you had a chance to post your plan for the Canadian trades you completed recently?

Thanks,
Mike

[azmike]

This reply has been marked as private.

[azmike]

Thank you Tom.

[azmike]

Teddi,

I just looked at the blue stocks menu and noticed that many stocks have not been updated since January. For example INTC has the latest article dated in January. I remember seeing INTC trade get filled in February. Maybe I am looking at the wrong place.

I can always lookup previous posts by using the search box on the right side. That is great for research and learning.

Once the developers integrate a way for you to quickly post updates for specific trades that would allow members to follow each trade from the opening to closing, it would be very useful tool.

Thank you for the great website!

Mike

[azmike]

Thank you Teddi.

[azmike]

Thank you Teddi. That is my goal to sell puts on strong companies and if assigned to sell covered calls, while getting dividend when possible.

As you always say, we should sell puts on companies we do not mind owning. That is why I wanted to ask which companies would be a good fit.

I sell options on US stocks, but with the currency exchange, if I get assigned, the USD margin is really killing the trade. Of course, I could use one of your repair strategies and sell the assigned shares and then sell a new deep ITM put, but I could still end up with shares.

How do you handle US stocks? I guess you have USD available to hold the stocks if assigned.
Do you have any suggestions for US trades in a Canadian portfolio? Buying USD to hold assigned shares is just too expensive and risky.

Thank you.

[azmike]

Thank you for the link. I was also looking for the other articles Teddy mentioned in this series. I do not know if they actually exist, so wanted to ask Teddi.

[azmike]

Teddi,

Have you had a chance to locate those articles about Building a Fortress Portfolio from leap options?

Thanks.
Mike

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