OPTIONS
Double Your Writing Power
More Mileage From Margin
by John Summa
Looking for ways to get more from your margin? Try this.
As an option writer, which by definition produces limited profit scenarios, I am particularly concerned about finding ways to lower my cost of trading. One way is to get maximum mileage out of my margin capital. So I decided to undertake a comparative study of margin requirements for option trades in two popular markets used by option writers: the CBOE's Options Exchange (OEX) and the Chicago Mercantile Exchange's Standard & Poor's stock index futures. If you are serious about option writing, you may be surprised at what I discovered.
THE NAKED OUT-OF-THE-MONEY CALL
I compared margin requirements for two writing strategies: (1) a naked out-of-the-money call and (2) a call credit spread. Specifically, I looked at what the margin requirements would be for an imaginary OEX (S&P 100) option seller compared with those of an S&P 500 CME stock index futures options seller. I made the comparison at equal percentage distance from the money and using the same expiration month of December 2003. Prices are settlement prices for September 25, 2003, with 84 days to expiration. I abstracted from volatility since the S&P 100 and S&P 500 share similar volatility patterns.
On September 25, 2003 the OEX settled at 502.62. For the OEX naked call writer, therefore, what would be the margin cost per dollar of premium received for a 10% out-of-the-money naked call? A 10% out-of-the-money position would mean selling a December 550 call. On December 25 at settlement, the OEX 550 call option would have fetched $4.20, which would result in a credit of $420 in our OEX writer's account (OEX options are valued at $100 per 100 basis points of premium).
Figure 1: Comparison of margin costs for a naked december call option. As shown here, the CME stock index options writer would pay just $4.64 per $1.00 in premium collected, a savings of $1.31.
...Continued in the March issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the March 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.
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