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Colin,
at the moment I cannot verify whether you are right regarding the margin
numbers. Since I only do positions with strictly defined risks, such as
vertical spreads, I am not very familiar with the margin calculations for
positions which carry open-ended risks. I will inquire with Option-Vue and
find out what their reading is. Since this software is used by many market
makers, they ought to know.
Nevertheless, even at your reduced numbers my points still stand:
1. Covered calls have exactly the same risk profile and payoff graphs as
naked puts. That means you can make no more than the premium received, and
have nearly unlimited downside risk.
2. Even if all goes well, covered calls cost a multiple in capital outlay as
compared to the equivalent naked puts.
Michael Suesserott
> -----Ursprüngliche Nachricht-----
> Von: cwest@xxxxxxxxxxxx [mailto:cwest@xxxxxxxxxxxx]
> Gesendet: Wednesday, January 16, 2002 18:33
> An: MikeSuesserott; Omegalist
> Betreff: RE: please critique this strategy
>
>
> Mike,
>
> My prime account is with Bear Stearns, and here's their cash flow of the
> example position, which is different to what OptionVue seems to indicate.
>
> Buy 1000 QQQ @$40.00 $40,000
> Sell 10 QQQ FJ @$6.60 ($6,600)
> Margin amount 50% of QQQ ($20,000)
>
> The debit balance of the account is therefore $13,400 or just under 35% of
> the value of the stock.
>
> Presumably OptionVue is using Reg T rules, but they're perhaps
> misunderstood
> or erroneously calculated, or both.
>
> I don't think your calculation of margin for short puts is "real-world."
> Using Bear Stearns again as a guide, they'd want about twice the amount of
> the credit as collateral for the trade, and would not allow any of the
> credit to offset that collateral requirement. That's probably not atypical
> for a naked trade.
>
> Considering the above, I still think that the margin requirements would be
> around the same for naked puts or leveraged covered calls. And if
> there was
> a way in OptionVue to override it's interpretation of margin requirements,
> the profit graphs should be about the same.
>
> Colin
>
> -----Original Message-----
> From: MikeSuesserott [mailto:MikeSuesserott@xxxxxxxxxxx]
> Sent: Wednesday, January 16, 2002 10:00 AM
> To: cwest@xxxxxxxxxxxx; Omegalist
> Subject: please critique this strategy
>
> Colin,
>
> I fed your position into Option-Vue with yesterday's closing prices.
> According to Option-Vue, you'd pay $34,805 (stock price minus
> call premium).
> This is the simple part. The software further indicates an
> initial margin of
> $18,000 (gross) or $16,805 (net). My reading is that the customer
> would have
> to put up this sum, too, but I may be wrong here. Perhaps Mr. Lothian can
> help?
>
> In any case, the equivalent naked put position only requires a margin of
> $5,000 at current prices which I hope you will agree is considerably less
> than the stock price even without the margin for the calls, if any.
>
> Best wishes,
>
> Michael Suesserott
>
> > -----Ursprüngliche Nachricht-----
> > Von: cwest@xxxxxxxxxxxx [mailto:cwest@xxxxxxxxxxxx]
> > Gesendet: Wednesday, January 16, 2002 17:21
> > An: MikeSuesserott; Omegalist
> > Betreff: RE: please critique this strategy
> >
> >
> > Mike,
> >
> > I disagree with your calculation of the amount required to fund
> my example
> > trade. I checked with Bear Stearns and here are their comments
> > and I've also
> > included the salient parts of Reg. T (which is used to guide the
> > calculation
> > of margin amounts).
> >
> > >From Bear Stearns....
> > As far as equity goes, you get 1:1 for fully paid securities,
> and 2:1 for
> > cash in buying power. Right now QQQ is trading around 40, so you'd need
> > just over $40,000 in fully paid securities or $20,000 to margin
> > 1000 QQQ. I
> > say "over" to cover commissions.
> > There is no requirement for the calls if they are covered. You may not
> > "finance" the position by selling the calls first and using the
> proceed of
> > the sale for the purpose of buying the stock.
> >
> > Reg. T
> > Reg. T Initial Margin Requirements: No requirement on option.
> > 50% of market
> > value of underlying security if new position.
> > Maintenance Margin Requirements: No requirement on option.
> Requirement on
> > stock is 25% of the lower of strike price or market value.
> >
> > My understanding and practice is that the credit from sold calls
> > credits my
> > account and I can still leverage the stock that is used to
> cover the sold
> > calls. Isn't this different to what you say? And if so, then
> wouldn't the
> > profit factors in the example when comparing short puts and short
> > (leveraged
> > covered) calls be different?
> > Colin
> >
> >
> >
> > -----Original Message-----
> > From: MikeSuesserott [mailto:MikeSuesserott@xxxxxxxxxxx]
> > Sent: Wednesday, January 16, 2002 5:02 AM
> > To: caw; Omegalist
> > Subject: please critique this strategy
> >
> > Colin,
> >
> > we would have to include the QQQ price of about $40,000 in the
> > calculation,
> > and add this to the $12,000 in margin for the short calls. None
> > of this sum
> > of $52,000 would bear any interest, nor would there be any
> dividends, nor
> > could it be used as collateral for anything else if we want our
> > short calls
> > to be covered. That money will be wholly tied-up in the position.
> >
> > As regards early assignment, the problem is that assignment is an
> > event over
> > which we have no control. Whether it increases or decreases the
> > ROI depends
> > on a number of factors, most notably the price of QQQ at that time.
> >
> > The delta aspect you mention will become totally moot the moment the QQQ
> > really tanks, a possibility that should not be ignored for a responsible
> > risk analysis.
> >
> > Regarding volatilities, it is erroneous to expect calls to have
> much less
> > volatility than puts in the case of a crash. Due to put-call
> > parity, a type
> > of arbitrage is possible that will tend to keep these
> volatilities pretty
> > much in line with each other, temporary imbalances notwithstanding. Even
> > during the 1987 crash, call implied volatilities went up sky high.
> >
> > And yes, the profit graph for the covered call position will be
> > the same as
> > for the naked puts. We cannot simply discard one of the variables. If we
> > were to leave out the price of the stock from the calculation, we
> > would not
> > be analyzing *covered* calls any more, but naked calls.
> >
> > Hope this helps.
> >
> > Michael Suesserott
> >
>
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