Opened:
Pos Symbol Price Comm Net
-2 ABT 17AUG13 50.0 P 0.52 0.76 (103.24)
-3 AFL 17AUG13 40.0 P 1.05 1.15 (313.85)
-2 RIG 16FEB13 47.0 C 1.07 1.53 (212.47)
-1 UNP 17AUG13 100.0 P 2.52 0.69 (251.31)
Also on December 26, $102.00 in dividends were paid on 200 shares of CSE. Part of this was from a $0.50 per share bonus dividend, which resulted in the CSE 19-Jan-13 7.0 call options to have their strike price reduced to $6.50.
Showing posts with label covered calls. Show all posts
Showing posts with label covered calls. Show all posts
Tuesday, January 1, 2013
Sunday, December 23, 2012
December 21, 2012 Options Expirations and Update
Closed:
Pos Symbol Price Comm Net
-2 RIG 22DEC12 47.0 C 0.00 0.00 0.00
Basis 11/19/2012: (199.22)
Profit/(Loss): 199.22
-5 CREE 22DEC12 15.0 P 0.00 0.00 0.00
Basis 05/21/2012: (473.57)
Profit/(Loss): 473.57
Value 08/31/2012: (68.97)
Post-August Profit/(Loss): 68.97
-4 DOW 22DEC12 25.0 P 0.00 0.00 0.00
Basis 04/26/2012: (338.85)
Profit/(Loss): 338.85
Value 08/31/2012: (248.12)
Post-August Profit/(Loss): 248.12
-3 NE 22DEC12 30.0 P 0.00 0.00 0.00
Basis 04/23/2012: (496.72)
Profit/(Loss): 496.72
Value 08/31/2012: (199.08)
-3 NE 22DEC12 30.0 P 0.00 0.00 0.00
Basis 04/23/2012: (496.72)
Profit/(Loss): 496.72
Value 08/31/2012: (199.08)
Post-August Profit/(Loss): 199.08
-3 POT 22DEC12 32.5 P 0.00 0.00 0.00
Basis 04/23/2012: (387.82)
Profit/(Loss): 387.82
Value 08/31/2012: (150.20)
-3 POT 22DEC12 32.5 P 0.00 0.00 0.00
Basis 04/23/2012: (387.82)
Profit/(Loss): 387.82
Value 08/31/2012: (150.20)
Post-August Profit/(Loss): 150.20
-5 TIE 22DEC12 10.0 P 0.00 0.00 0.00
Basis 04/23/2012: (222.37)
Profit/(Loss): 222.37
Value 08/31/2012: (142.82)
Also since the last update, $7,500.00 was withdrawn from the account on December 4, $112.50 in dividends was paid on December 1 for 500 shares INTC, $82.50 was paid December 12 on 300 shares WAG, $142.00 was paid December 14 on 400 shares WM, $172.00 in dividends became payable December 12 on 400 shares ARCC, $102.00 became payable December 18 on 200 shares CSE, $10.00 became payable December 5 on 100 shares FTR, $190.00 became payable December 20 on 1,000 shares GE, $6.56 interest accrued and $8.33 was paid.
-5 TIE 22DEC12 10.0 P 0.00 0.00 0.00
Basis 04/23/2012: (222.37)
Profit/(Loss): 222.37
Value 08/31/2012: (142.82)
Post-August Profit/(Loss): 142.82
Also since the last update, $7,500.00 was withdrawn from the account on December 4, $112.50 in dividends was paid on December 1 for 500 shares INTC, $82.50 was paid December 12 on 300 shares WAG, $142.00 was paid December 14 on 400 shares WM, $172.00 in dividends became payable December 12 on 400 shares ARCC, $102.00 became payable December 18 on 200 shares CSE, $10.00 became payable December 5 on 100 shares FTR, $190.00 became payable December 20 on 1,000 shares GE, $6.56 interest accrued and $8.33 was paid.
Sunday, November 25, 2012
November 19, 2012 Trades
Opened:
Pos Symbol Price Comm Net
-4 BMY 19JAN13 33.0 C 0.35 3.04 (136.96)
-2 RIG 22DEC13 47.0 C 1.00 0.78 (199.22)
Wednesday, November 21, 2012
November 16, 2012 Options Expirations and Update
Closed:
Pos Symbol Price Comm Net
-4 BMY 17NOV12 35.0 C 0.00 0.00 0.00
Basis 10/19/2012: (64.96)
Profit/(Loss): 64.96
-2 RIG 17NOV12 50.0 C 0.00 0.00 0.00
Basis 10/19/2012: (231.24)
Profit/(Loss): 231.24
-2 COP1 17NOV12 60.0 P 0.00 0.00 0.00
Basis 03/22/2012: (294.55)
Profit/(Loss): 294.55
Value 08/31/2012: (43.43)
Post-August Profit/(Loss): 43.43
-2 HES 17NOV12 40.0 P 0.00 0.00 0.00
Basis 03/22/2012: (347.08)
Profit/(Loss): 347.08
Value 08/31/2012: (145.47)
-2 HES 17NOV12 40.0 P 0.00 0.00 0.00
Basis 03/22/2012: (347.08)
Profit/(Loss): 347.08
Value 08/31/2012: (145.47)
Post-August Profit/(Loss): 145.47
-2 MDT 17NOV12 29.0 P 0.00 0.00 0.00
Basis 03/23/2012: (225.10)
Profit/(Loss): 225.10
Value 08/31/2012: (44.41)
-2 MDT 17NOV12 29.0 P 0.00 0.00 0.00
Basis 03/23/2012: (225.10)
Profit/(Loss): 225.10
Value 08/31/2012: (44.41)
Post-August Profit/(Loss): 44.41
Also since the last update, $112.40 in dividends was paid on November 15 for 200 shares of PG, and $8.98 interest accrued and $3.98 was paid.
Also since the last update, $112.40 in dividends was paid on November 15 for 200 shares of PG, and $8.98 interest accrued and $3.98 was paid.
Saturday, November 10, 2012
November 9, 2012 Trades
Closed:
Pos Symbol Price Comm Net
400 STX SEAGATE TECH PLC 29.61 0.24 11,623.76
Basis 10/19/2012: 11,160.00
Profit/(Loss): 463.76
-4 STX 17NOV12 27.0 C 2.61 0.00 (1,044.00)
Basis 10/22/2012: (796.95)
Profit/(Loss): (247.05)
Opened:
Pos Symbol Price Comm Net
-5 STX 19JAN13 24.0 P 0.38 3.80 (186.20)
The STX call options were exercised against me prior to their expiration date in order to capture a dividend with ex-dividend date of October 9.
-5 STX 19JAN13 24.0 P 0.38 3.80 (186.20)
The STX call options were exercised against me prior to their expiration date in order to capture a dividend with ex-dividend date of October 9.
Sunday, October 28, 2012
October 22, 2012 Trades
Opened:
Pos Symbol Price Comm Net
-4 BMY 17NOV12 35.0 C 0.17 3.04 (64.96)
-5 INTC 20NOV13 25.0 C 0.43 3.80 (211.20)
-2 RIG 17NOV12 50.0 C 1.16 0.76 (231.24)
-4 STX 17NOV12 27.0 C 2.00 3.05 (796.95)
Pos Symbol Price Comm Net
-4 BMY 17NOV12 35.0 C 0.17 3.04 (64.96)
-5 INTC 20NOV13 25.0 C 0.43 3.80 (211.20)
-2 RIG 17NOV12 50.0 C 1.16 0.76 (231.24)
-4 STX 17NOV12 27.0 C 2.00 3.05 (796.95)
Monday, October 22, 2012
October 19, 2012 Options Expirations, Trades, and Update
Closed:
Pos Symbol Price Comm Net
-4 BMY 20OCT12 34.0 C 0.00 0.00 0.00
Basis 09/24/2012: (102.48)
Profit/(Loss): 102.48
-2 RIG 20OCT12 50.0 C 0.00 0.00 0.00
Basis 09/24/2012: (150.48)
Profit/(Loss): 150.48
-3 WAG 20OCT12 33.0 C 2.84 2.28 854.28
Basis 05/21/2012: (457.72)
Profit/(Loss): (396.56)
Value 08/31/2012: (940.89)
Post-August Profit/(Loss): 86.61
-3 DD 20OCT12 40.0 P 0.00 0.00 0.00
Basis 02/29/2012: (288.55)
Profit/(Loss): 288.55
Value 08/31/2012: (20.29)
Post-August Profit/(Loss): 20.29
-5 INTC 20OCT12 25.0 P 3.735 0.00 1,867.50
Basis 08/17/2012: (242.70)
Profit/(Loss): (1,624.80)
Value 08/31/2012: (494.90)
Post-August Profit/(Loss): (494.90)
-3 SNDK 20OCT12 35.0 P 0.00 0.00 0.00
Basis 02/21/2012: (554.08)
Profit/(Loss): 554.08
Value 08/31/2012: (164.04)
Post-August Profit/(Loss): 164.04
-4 STX 20OCT12 28.0 P 0.10 0.00 40.00
Basis 08/21/2012: (208.96)
Profit/(Loss): 168.96
-2 TM 20OCT12 55.0 P 0.00 0.00 0.00
Basis 02/29/2012: (109.39)
Profit/(Loss): 109.39
Value 08/31/2012: (2.47)
Post-August Profit/(Loss): 2.47
-3 UPS 20OCT12 33.0 P 0.00 0.00 0.00
Basis 02/23/2012: (249.39)
Profit/(Loss): 249.39
Value 08/31/2012: (12.47)
Post-August Profit/(Loss): 12.47
Opened:
Pos Symbol Price Comm Net
500 INTC INTEL CORPORATION 21.265 0.00 10,632.50
400 STX SEAGATE TECH PLC 27.90 0.00 11,160.00
-4 BBBY 20OCT12 40.0 P 0.50 1.14 (148.86)
Also, on October 3 I withdrew $2,500.00 from the account and a dividend of $136.00 became payable November 1 on 400 shares of BMY; on October 5 a dividend of $206.00 became payable November 1 on 400 shares of VZ; and on October 17 a dividend of $112.40 became payable November 15 on 200 shares of PG.
Opened:
Pos Symbol Price Comm Net
500 INTC INTEL CORPORATION 21.265 0.00 10,632.50
400 STX SEAGATE TECH PLC 27.90 0.00 11,160.00
-4 BBBY 20OCT12 40.0 P 0.50 1.14 (148.86)
Also, on October 3 I withdrew $2,500.00 from the account and a dividend of $136.00 became payable November 1 on 400 shares of BMY; on October 5 a dividend of $206.00 became payable November 1 on 400 shares of VZ; and on October 17 a dividend of $112.40 became payable November 15 on 200 shares of PG.
Sunday, October 7, 2012
An Options Quiz I
1. Which day of the month is normally the last day on which standard equity option contracts can be traded?
a) The 20th.
b) The first Wednesday after the 15th of the month.
c) The third Friday of the month.
d) The Friday immediately before the third Saturday of the month.
e) The last Friday of the month.
2. Which event will generally cause the price of a call option to increase?
a) The passage of time.
b) An increase in the implied volatility of the contract.
c) A drop in the price of the underlying security.
d) An increase in the risk-free interest rate.
e) None of the above.
3. If the market for a security is efficient, which of the following should never occur?
a) Expected rate of return on the security is less than the risk-free interest rate.
b) Price of the security doubles in less than one month.
c) A portfolio with an identical cash flow can be created with a lower total price.
d) Highest bid for the security is greater than the lowest ask.
e) Both (c) and (d).
4. A European-style options differs from an American-style options in what way?
a) European-style options can only be exercised on their date of expiration, while American-style options can be exercised on any date prior to their date of expiration.
b) European-style options can be exercised on any date prior to their date of expiration, while American-style options can only be exercised on their date of expiration.
c) European-style options are traded in euros, while American-style options are traded in dollars.
d) European-style options are only traded in increments of five cents, while American-style options are traded in one cent increments.
e) European-style options are traded on commodities, currencies, and interest rates, while American-style options are traded only on corporate equity.
5. Options differ from a futures in what way?
a) Futures can be held as investments, while options can only be used for trading.
b) Short positions cannot be held on options, but they can on futures.
c) "Futures" and "options" are just different names for the same thing.
d) Futures can only be traded on very large positions in the underlying security or commodity, while options can be traded on relatively small amounts.
e) Futures are always settled at expiration, but options are settled only at the owner's discretion.
6. If on the 1st of October, the exchange-traded option contracts available for a particular stock have expiration months of October and November; January, February, and May of the following year; and January of the second following year, then on the 1st of November the following expiration months will probably be available for exchange-traded options contracts on the stock:
a) October, November, and December; January, February, and May of the following year; and January of the second following year.
b) November; January, February, and May of the following year; and January of the second following year.
c) November and December; January, February, March, and May of the following year; and January of the second following year.
d) November and December; January, February, and May of the following year; and January of the second following year.
e) November and December; January, February, May, and August of the following year; and January of the second following year.
Answers:
1(c), 2(b), 3(e), 4(a), 5(e), 6(d)
a) The 20th.
b) The first Wednesday after the 15th of the month.
c) The third Friday of the month.
d) The Friday immediately before the third Saturday of the month.
e) The last Friday of the month.
2. Which event will generally cause the price of a call option to increase?
a) The passage of time.
b) An increase in the implied volatility of the contract.
c) A drop in the price of the underlying security.
d) An increase in the risk-free interest rate.
e) None of the above.
3. If the market for a security is efficient, which of the following should never occur?
a) Expected rate of return on the security is less than the risk-free interest rate.
b) Price of the security doubles in less than one month.
c) A portfolio with an identical cash flow can be created with a lower total price.
d) Highest bid for the security is greater than the lowest ask.
e) Both (c) and (d).
4. A European-style options differs from an American-style options in what way?
a) European-style options can only be exercised on their date of expiration, while American-style options can be exercised on any date prior to their date of expiration.
b) European-style options can be exercised on any date prior to their date of expiration, while American-style options can only be exercised on their date of expiration.
c) European-style options are traded in euros, while American-style options are traded in dollars.
d) European-style options are only traded in increments of five cents, while American-style options are traded in one cent increments.
e) European-style options are traded on commodities, currencies, and interest rates, while American-style options are traded only on corporate equity.
5. Options differ from a futures in what way?
a) Futures can be held as investments, while options can only be used for trading.
b) Short positions cannot be held on options, but they can on futures.
c) "Futures" and "options" are just different names for the same thing.
d) Futures can only be traded on very large positions in the underlying security or commodity, while options can be traded on relatively small amounts.
e) Futures are always settled at expiration, but options are settled only at the owner's discretion.
6. If on the 1st of October, the exchange-traded option contracts available for a particular stock have expiration months of October and November; January, February, and May of the following year; and January of the second following year, then on the 1st of November the following expiration months will probably be available for exchange-traded options contracts on the stock:
a) October, November, and December; January, February, and May of the following year; and January of the second following year.
b) November; January, February, and May of the following year; and January of the second following year.
c) November and December; January, February, March, and May of the following year; and January of the second following year.
d) November and December; January, February, and May of the following year; and January of the second following year.
e) November and December; January, February, May, and August of the following year; and January of the second following year.
Answers:
1(c), 2(b), 3(e), 4(a), 5(e), 6(d)
Monday, September 24, 2012
September 24, 2012 Trades
Opened:
Pos Symbol Price Comm Net
-4 BMY 19OCT12 34.0 C 0.26 1.52 (102.48)
-2 RIG 19OCT12 50.0 C 0.76 1.52 (150.48)
-4 C 15MAR13 25.0 P 0.85 1.52 (266.48)
-4 ABX 19APR13 30.0 P 0.70 3.04 (276.96)
-2 DDS 17MAY13 60.0 P 2.95 1.13 (588.87)
Pos Symbol Price Comm Net
-4 BMY 19OCT12 34.0 C 0.26 1.52 (102.48)
-2 RIG 19OCT12 50.0 C 0.76 1.52 (150.48)
-4 C 15MAR13 25.0 P 0.85 1.52 (266.48)
-4 ABX 19APR13 30.0 P 0.70 3.04 (276.96)
-2 DDS 17MAY13 60.0 P 2.95 1.13 (588.87)
Friday, September 21, 2012
September 21, 2012 Options Expirations and Update
Closed:
Pos Symbol Price Comm Net
-4 BMY 22SEP12 34.0 C 0.00 0.00 0.00
Basis 05/21/2012: (345.09)
Profit/(Loss): 345.09
Value 08/31/2012: (53.43)
Post-August Profit/(Loss): 53.43
-2 RIG 22SEP12 50.0 C 0.00 0.00 0.00
Basis 08/20/2012: (274.48)
Profit/(Loss): 274.48
Value 08/31/2012: (224.17)
Post-August Profit/(Loss): 224.17
-3 CE 22SEP12 30.0 P 0.00 0.00 0.00
Basis 02/23/2012: (222.94)
Profit/(Loss): 222.94
Value 08/31/2012: (3.72)
Post-August Profit/(Loss): 3.72
-2 EMR 22SEP12 35.0 P 0.00 0.00 0.00
Basis 03/23/2012: (89.35)
Profit/(Loss): 89.35
Value 08/31/2012: (0.01)
Post-August Profit/(Loss): 0.01
-2 NSC 22SEP12 60.0 P 0.00 0.00 0.00
Basis 01/23/2012: (418.94)
Profit/(Loss): 418.94
Value 08/31/2012: (0.59)
Post-August Profit/(Loss): 0.59
-1 V 22SEP12 90.0 P 0.00 0.00 0.00
Basis 01/23/2012: (533.97)
Profit/(Loss): 533.97
Value 08/31/2012: (0.00)
Post-August Profit/(Loss): 0.00
Also since the last update, effective September 20 a $170.00 dividend became payable for 1,000 shares of GE, and on September 21 a $142.01 dividend was paid on 400 shares of WM.
Wednesday, September 19, 2012
September 19, 2012 Trades and Update
Closed:
Pos Symbol Price Comm Net
-4 GE 22SEP12 20.0 C 2.49 3.79 (2,493.79)
Basis 01/20/2012: (1,002.74)
Profit/(Loss): (1,491.05)
Value 08/31/2012: (827.26)
Post-August Profit/(Loss): (1,646.23)
Opened:
Pos Symbol Price Comm Net
-4 GE 16MAR13 21.0 C 1.89 9.48 (1,880.52)
This pair of transactions was made in advance of an GE ex-dividend date of September 20, with a dividend amount of $0.17 per share.
Also since the last update, effective September 12 a $172.00 dividend became payable for 400 shares of ARCC and a $2.00 dividend became payable for 200 shares of CSE, and an $82.50 dividend was paid on September 12 for 300 shares of WAG.
Pos Symbol Price Comm Net
-4 GE 22SEP12 20.0 C 2.49 3.79 (2,493.79)
Basis 01/20/2012: (1,002.74)
Profit/(Loss): (1,491.05)
Value 08/31/2012: (827.26)
Post-August Profit/(Loss): (1,646.23)
Opened:
Pos Symbol Price Comm Net
-4 GE 16MAR13 21.0 C 1.89 9.48 (1,880.52)
This pair of transactions was made in advance of an GE ex-dividend date of September 20, with a dividend amount of $0.17 per share.
Also since the last update, effective September 12 a $172.00 dividend became payable for 400 shares of ARCC and a $2.00 dividend became payable for 200 shares of CSE, and an $82.50 dividend was paid on September 12 for 300 shares of WAG.
Tuesday, September 11, 2012
September 11, 2012 Trades and Update
Closed:
Pos Symbol Price Comm Net
-4 ARCC 22SEP12 16.0 C 1.70 0.04 (680.04)
Basis 06/18/2012: (117.09)
Profit/(Loss): (562.95)
Value 08/31/2012: (519.80)
Post-August Profit/(Loss): (160.24)
Opened:
Pos Symbol Price Comm Net
-4 ARCC 16MAR13 17.0 C 0.85 0.04 (339.96)
This pair of transactions was made in advance of an ARCC ex-dividend date of September 12, with a dividend amount of $0.43 per share, consisting of $0.38 regular dividend and $0.05 special dividend.
Also since the last update, effective September 5 a $10.00 dividend became payable for 100 shares of FTR and a $142.00 dividend became payable for 400 shares of WM.
Pos Symbol Price Comm Net
-4 ARCC 22SEP12 16.0 C 1.70 0.04 (680.04)
Basis 06/18/2012: (117.09)
Profit/(Loss): (562.95)
Value 08/31/2012: (519.80)
Post-August Profit/(Loss): (160.24)
Opened:
Pos Symbol Price Comm Net
-4 ARCC 16MAR13 17.0 C 0.85 0.04 (339.96)
This pair of transactions was made in advance of an ARCC ex-dividend date of September 12, with a dividend amount of $0.43 per share, consisting of $0.38 regular dividend and $0.05 special dividend.
Also since the last update, effective September 5 a $10.00 dividend became payable for 100 shares of FTR and a $142.00 dividend became payable for 400 shares of WM.
Monday, September 10, 2012
A Comment On Margin
The portfolio statistic that I keep my eyes most closely on is the "Available Funds," which is the difference between Account Equity and Account Margin Requirement. When Available Funds falls to zero, you get a margin call, and you have to liquidate positions whether you want to or not.
The August 31 summary statistics for the account I'm following on this blog are repeated below:
Cash: $ 12,287.18
Accrued Dividends: 82.70
Stocks: 110,606.66
Options: (8,939.31)
Account Value: $114,037.23
Equity: $122,995.54
Margin Requirement: 68,797.67
Available Funds: 54,197.87
Regulation T Margin Requirement: 94,941.99
Special Memorandum Acct: 43,637.69
Generally, if you are not borrowing money and you are not shorting any securities, you don't have to worry about margin. You can also sell covered calls without having to worry about margin.
The portion of my trading strategy that involves margin is selling naked puts, which also happens to be where I expect to make the best return on investment; covered calls, to my thinking, mainly serve to mitigate risk.
Anyway, if you are trading with margin, it's important to know how the margin requirements for your account are determined. There are legal requirements that must be met, but most brokerage firms will have additional requirements, and the ones that matter are those that your brokerage firm enforces. I'll review my broker's requirements, but be aware that there may be differences with your broker, and that the differences will not be subtle when it matters.
First, Equity is just the sum of Cash, Accrued Dividends, and Stocks and Bonds (in my case, just Stocks). There is a slight difference between this sum in the numbers above and the Equity reported, due (I believe) to differences in how bid-and-ask spreads are dealt with for Account Value purposes (which is where I took the basic numbers from) and for Equity purposes.
The margin requirements for stocks are 25% of the stocks' market value. For covered calls, the requirement is any in-the-money amount. To a certain extent, this doesn't make sense: for a stock trading at $100 with a covered call exercizable at $100 as well, the equity is $100 and the margin requirement is $25, for net available funds (equity less margin requirement) of $75; if the same stock goes up to $110 (the covered call remains exercizable at $100), the equity is $110 but the margin requirement is $27.50 for the stock and $10 for the covered all, for a total of $37.50 and net available funds of $72.50. So a stock with a covered call that is in the money (which is in fact a more certain position) adds less to available funds that a stock with a covered call that is exactly at the money.
Regardless, I don't make the rules, I just have to abide by them: the upshot of this for me is that I try to have my covered calls out-of-the-money in order to avoid the counter-logical hit to available funds. For Regulation T requirements, which include a margin requirement of 50% of market value for stocks, the hit is more severe: available funds for the covered call example above would go from $50 at-the-money to $40 in-the-money. More on Regulation T later.
The margin requirement for a naked put is the market value of the put plus the greater of (a) 10% of the strike price, (b) the strike price less 80% of the market value of the stock, and (c) $2.50. Items (a) and (b) together create a point of inflection at one-and-one-eighth (1 1/8 or 112.5%) of the strike price: if the stock price is above this, the margin requirement will be the market value of the put plus 10% of the strike price; if the stock price is below this, the margin requirement is the strike price less 80% of the market value of the stock. The latter situation is one I generally try to avoid: given that the market value of the put is also moving, the margin requirement is very volatile when is is based on the strike price offset by 80% of the stock's market value. I tend to open naked put positions such that the stock price is 125% of the strike price or higher, which gives some wiggle room before the margin requirement reaches this volatile situation.
Where the naked put strike price is less than $25, the item (c) $2.50 addition to the margin requirement will dominate the 10% of the strike price amount, so there will be a different inflection point, but otherwise the same considerations apply.
In addition to the regular margin requirements outlined above, an account using margin must also meet "Regulation T" requirements.* The Regulation T margin requirement calculations are the same as the regular margin requirement calculations except that the margin requirements for stocks under Regulation T is 50% of market value rather than 25%. This would normally make Regulation T requirements more restrictive than the regular requirements, but Regulation T requirements are applied differently: the "Special Memorandum Account" (SMA) is what really determines available funds under Regulation T, and this is determined on a daily basis as the minimum of (a) the current Regulation T margin requirement and (b) the SMA from the prior day adjusted by the Regulation T margin effects of any transactions within the account during the day. So basically, the SMA will never drop solely due to changes in market prices: it is locked in at a prior amount, subject to changes due to actual transactions in the account. It can, however, go up due to changes in market prices.
Also, note that because of the 50% margin requirement for stocks, Regulation T is a lot more lenient about naked put positions than it is about covered call positions, in spite of the fact that they are essentially identical: the change in value to a covered call position with a strike price of X will be exactly the same as the change in value to a naked put position on the same stock with a strike price of X.
* -- My brokerage firm allows a "Portfolio Margin" calculation to replace the Regulation T requirement if you elect it and if you keep your account equity above $110,000. I have not elected this, and my account equity is not so securely above $110,000 that I'd feel comfortable doing it at this point. Also, I don't mind too much that Regulation T reins me in from doing anything too stupid ...
The August 31 summary statistics for the account I'm following on this blog are repeated below:
Cash: $ 12,287.18
Accrued Dividends: 82.70
Stocks: 110,606.66
Options: (8,939.31)
Account Value: $114,037.23
Equity: $122,995.54
Margin Requirement: 68,797.67
Available Funds: 54,197.87
Regulation T Margin Requirement: 94,941.99
Special Memorandum Acct: 43,637.69
Generally, if you are not borrowing money and you are not shorting any securities, you don't have to worry about margin. You can also sell covered calls without having to worry about margin.
The portion of my trading strategy that involves margin is selling naked puts, which also happens to be where I expect to make the best return on investment; covered calls, to my thinking, mainly serve to mitigate risk.
Anyway, if you are trading with margin, it's important to know how the margin requirements for your account are determined. There are legal requirements that must be met, but most brokerage firms will have additional requirements, and the ones that matter are those that your brokerage firm enforces. I'll review my broker's requirements, but be aware that there may be differences with your broker, and that the differences will not be subtle when it matters.
First, Equity is just the sum of Cash, Accrued Dividends, and Stocks and Bonds (in my case, just Stocks). There is a slight difference between this sum in the numbers above and the Equity reported, due (I believe) to differences in how bid-and-ask spreads are dealt with for Account Value purposes (which is where I took the basic numbers from) and for Equity purposes.
The margin requirements for stocks are 25% of the stocks' market value. For covered calls, the requirement is any in-the-money amount. To a certain extent, this doesn't make sense: for a stock trading at $100 with a covered call exercizable at $100 as well, the equity is $100 and the margin requirement is $25, for net available funds (equity less margin requirement) of $75; if the same stock goes up to $110 (the covered call remains exercizable at $100), the equity is $110 but the margin requirement is $27.50 for the stock and $10 for the covered all, for a total of $37.50 and net available funds of $72.50. So a stock with a covered call that is in the money (which is in fact a more certain position) adds less to available funds that a stock with a covered call that is exactly at the money.
Regardless, I don't make the rules, I just have to abide by them: the upshot of this for me is that I try to have my covered calls out-of-the-money in order to avoid the counter-logical hit to available funds. For Regulation T requirements, which include a margin requirement of 50% of market value for stocks, the hit is more severe: available funds for the covered call example above would go from $50 at-the-money to $40 in-the-money. More on Regulation T later.
The margin requirement for a naked put is the market value of the put plus the greater of (a) 10% of the strike price, (b) the strike price less 80% of the market value of the stock, and (c) $2.50. Items (a) and (b) together create a point of inflection at one-and-one-eighth (1 1/8 or 112.5%) of the strike price: if the stock price is above this, the margin requirement will be the market value of the put plus 10% of the strike price; if the stock price is below this, the margin requirement is the strike price less 80% of the market value of the stock. The latter situation is one I generally try to avoid: given that the market value of the put is also moving, the margin requirement is very volatile when is is based on the strike price offset by 80% of the stock's market value. I tend to open naked put positions such that the stock price is 125% of the strike price or higher, which gives some wiggle room before the margin requirement reaches this volatile situation.
Where the naked put strike price is less than $25, the item (c) $2.50 addition to the margin requirement will dominate the 10% of the strike price amount, so there will be a different inflection point, but otherwise the same considerations apply.
In addition to the regular margin requirements outlined above, an account using margin must also meet "Regulation T" requirements.* The Regulation T margin requirement calculations are the same as the regular margin requirement calculations except that the margin requirements for stocks under Regulation T is 50% of market value rather than 25%. This would normally make Regulation T requirements more restrictive than the regular requirements, but Regulation T requirements are applied differently: the "Special Memorandum Account" (SMA) is what really determines available funds under Regulation T, and this is determined on a daily basis as the minimum of (a) the current Regulation T margin requirement and (b) the SMA from the prior day adjusted by the Regulation T margin effects of any transactions within the account during the day. So basically, the SMA will never drop solely due to changes in market prices: it is locked in at a prior amount, subject to changes due to actual transactions in the account. It can, however, go up due to changes in market prices.
Also, note that because of the 50% margin requirement for stocks, Regulation T is a lot more lenient about naked put positions than it is about covered call positions, in spite of the fact that they are essentially identical: the change in value to a covered call position with a strike price of X will be exactly the same as the change in value to a naked put position on the same stock with a strike price of X.
* -- My brokerage firm allows a "Portfolio Margin" calculation to replace the Regulation T requirement if you elect it and if you keep your account equity above $110,000. I have not elected this, and my account equity is not so securely above $110,000 that I'd feel comfortable doing it at this point. Also, I don't mind too much that Regulation T reins me in from doing anything too stupid ...
Saturday, September 8, 2012
A Starting Point: August 31, 2012
I have been actively trading equity options since 1998, beginning with covered call until I built up enough equity to trade naked puts as well. For reasons that I'll eventually get into, I have always exclusively held short options positions.
Beginning in July 2001, I began making my living trading options. In the financial crash of 2008, I was essentially wiped out in my main, non-IRA account, which is something the reader should keep in mind if he chooses to follow my investing strategies. After a couple years back in the working world, I resumed living off of investment income in June 2010.
In order that a live example of my options trading strategies can be followed, I'm going to post trades made to my main non-IRA account. Note that I have income from outside of this account, so I am able to take risks with it that otherwise lead easily to catastrophe. In general, I hope to generate an average of $1,000 a month in cash flow from this account, or a little better than 10% per year, while growing or at least maintaining the account value.
But options trading always has to be considered in the context of an entire portfolio, so to start things out, here are my account positions at the close of trading on August 31, 2012:
Cash: $ 12,287.18
Accrued Dividends: 82.70
Stocks: 110,606.66
Options: (8,939.31)
Account Value: $114,037.23
Equity: $122,995.54
Margin Requirement: 68,797.67
Available Funds: 54,197.87
Regulation T Margin Requirement: 94,941.99
Special Memorandum Acct: 43,637.69
Pos Symbol/Name Price Value
400 ARCC ARES CAPITAL CORP 17.27 5,908.00
-4 ARCC 22SEP12 16.0 C 1.30 (519.80)
( 09/11/2012 +4 ARCC 22SEP12 16.0 C 1.70 680.04 )
( Post-August Profit/(Loss): (160.24) )
400 BMY BRISTOL-MYERS SQUIBB CO 33.01 13,204.00
-4 BMY 22SEP12 34.0 C 0.13 (53.43)
( 09/21/2012 +4 BMY 22SEP12 34.0 C 0.00 0.00 )
( Post-August Profit/(Loss): 53.43 )
1000 GE GENERAL ELECTRIC CO 20.71 20,710.00
-10 GE 22SEP12 20.0 C 0.83 (827.26)
( 09/19/2012 +10 GE 22SEP12 21.0 C 2.49 2,473.49 )
( Post-August Profit/(Loss): (1,646.23) )
200 RIG TRANSOCEAN LTD 49.03 9,806.00
-2 RIG 22SEP12 50.0 C 1.12 (224.17)
( 09/21/2012 +2 RIG 22SEP12 50.0 C 0.00 0.00 )
( Post-August Profit/(Loss): 224.17 )
CE CELANESE CORP 38.26
-3 CE 22SEP12 30.0 P 0.01 (3.72)
( 09/21/2012 +3 CE 22SEP12 30.0 P 0.00 0.00 )
( Post-August Profit/(Loss): 3.72 )
EMR EMERSON ELECTRIC CO 50.72
-2 EMR 22SEP12 35.0 P 0.00 (0.01)
( 09/21/2012 +2 EMR 22SEP12 35.0 P 0.00 0.00 )
( Post-August Profit/(Loss): 0.01 )
NSC NORFOLK SOUTHERN CORP 72.46
-2 NSC 22SEP12 60.0 P 0.00 (0.59)
( 09/21/2012 +2 NSC 22SEP12 60.0 P 0.00 0.00 )
( Post-August Profit/(Loss): 0.59 )
V VISA INC 128.25
-1 V 22SEP12 90.0 P 0.00 (0.00)
( 09/21/2012 +1 V 22SEP12 90.0 P 0.00 0.00 )
( Post-August Profit/(Loss): 0.00 )
300 WAG WALGREEN CO 35.76 10,728.00
-3 WAG 20OCT12 33.0 C 3.14 (940.89)
DD DUPONT AND CO 49.75
-2 DD 20OCT12 40.0 P 0.10 (20.29)
INTC INTEL CORP 24.83
-5 INTC 20OCT12 25.0 P 0.99 (494.90)
SNDK SANDISK CORP 41.22
-3 SNDK 20OCT12 35.0 P 0.55 (164.04)
STX SEAGATE TECHNOLOGY PLC 32.01
-4 STX 20OCT12 28.0 P 0.76 (303.14)
UPS UNITED PARCEL SVC INC 73.81
-2 UPS 20OCT12 60.0 P 0.06 (12.47)
COP CONOCOPHILIPS 56.79
PSX PHILLIPS 66 42.00
-2 COP1 17NOV12 60.0 P 0.22 (43.43)
HES HESS CORP 50.53
-3 HES 17NOV12 40.0 P 0.48 (145.47)
MDT MEDTRONIC INC 40.66
-4 MDT 17NOV12 29.0 P 0.11 (44.41)
CREE CREE INC 28.20
-5 CREE 22DEC12 15.0 P 0.14 (68.97)
DOW DOW CHEMICAL CO 29.31
-4 DOW 22DEC12 25.0 P 0.62 (248.12)
NE NOBLE CORP 38.14
-3 NE 22DEC12 30.0 P 0.66 (199.08)
POT POTASH CORP 41.07
-3 POT 22DEC12 32.5 P 0.50 (150.20)
TIE TITANIUM METALS CORP 12.24
-5 TIE 22DEC12 10.0 P 0.29 (142.82)
TM TOYOTA MOTORS CORP 79.62
-2 TM 20OCT12 55.0 P 0.01 (2.47)
200 CSE CAPITALSOURCE INC 6.93 1,386.00
-2 CSE 19JAN13 7.0 C 0.43 (85.02)
200 PG PROCTER & GAMBLE CO 67.19 13,438.00
-2 PG 19JAN13 67.5 C 2.04 (408.53)
400 WM WASTE MANAGEMENT INC 34.58 13,832.00
-4 WM 19JAN13 37.0 C 0.41 (164.21)
CMI CUMMINS INC 97.11
-2 CMI 19JAN13 45.0 P 0.21 (42.14)
HON HONEYWELL INTL INC 58.45
-3 HON 19JAN13 40.0 P 0.38 (114.47)
MMM 3M CO 92.60
-2 MMM 19JAN13 55.0 P 0.13 (26.60)
UTX UNITED TECHNOLOGY CORP 79.85
-2 UTX 19JAN13 50.0 P 0.41 (82.69)
A AGILENT TECHNOLOGIES INC 37.16
-4 A 16FEB13 25.0 P 0.49 (194.81)
CAT CATERPILLAR INC 85.33
-2 CAT 16FEB13 60.0 P 1.13 (226.38)
PH PARKER-HANNIFIN CORP 79.98
-2 PH 16FEB13 60.0 P 1.69 (337.73)
STT STATE STREET CORP 41.60
-3 STT 16FEB13 30.0 P 0.57 (169.59)
IR INGERSOLL-RAND PLC 46.76
-4 IR 16MAR13 25.0 P 0.31 (125.13)
JPM JPMORGAN CHASE & CO 37.14
-4 JPM 16MAR13 25.0 P 0.54 (215.80)
UNH UNITEDHEALTH GROUP INC 54.30
-3 UNH 16MAR13 40.0 P 0.95 (283.94)
400 VZ VERIZON COMM INC 42.94 17,176.00
-4 VZ 20APR13 43.0 C 2.04 (815.63)
LOW LOWE's COMPANIES INC 28.48
-5 LOW 20APR13 20.0 P 0.56 (278.17)
MAR MARRIOTT INTL INC 37.68
-4 MAR 20APR13 29.0 P 1.05 (418.42)
200 TSM TAIWAN SEMI-SP ADR 14.70 2,940.00
-2 TSM 18JAN14 15.0 C 1.70 (340.37)
34 DYNIQ DYNEGY INC 0.49 16.66
100 FTR FRONTIER COMM CORP 4.62 462.00
Beginning in July 2001, I began making my living trading options. In the financial crash of 2008, I was essentially wiped out in my main, non-IRA account, which is something the reader should keep in mind if he chooses to follow my investing strategies. After a couple years back in the working world, I resumed living off of investment income in June 2010.
In order that a live example of my options trading strategies can be followed, I'm going to post trades made to my main non-IRA account. Note that I have income from outside of this account, so I am able to take risks with it that otherwise lead easily to catastrophe. In general, I hope to generate an average of $1,000 a month in cash flow from this account, or a little better than 10% per year, while growing or at least maintaining the account value.
But options trading always has to be considered in the context of an entire portfolio, so to start things out, here are my account positions at the close of trading on August 31, 2012:
Cash: $ 12,287.18
Accrued Dividends: 82.70
Stocks: 110,606.66
Options: (8,939.31)
Account Value: $114,037.23
Equity: $122,995.54
Margin Requirement: 68,797.67
Available Funds: 54,197.87
Regulation T Margin Requirement: 94,941.99
Special Memorandum Acct: 43,637.69
Pos Symbol/Name Price Value
400 ARCC ARES CAPITAL CORP 17.27 5,908.00
-4 ARCC 22SEP12 16.0 C 1.30 (519.80)
( 09/11/2012 +4 ARCC 22SEP12 16.0 C 1.70 680.04 )
( Post-August Profit/(Loss): (160.24) )
400 BMY BRISTOL-MYERS SQUIBB CO 33.01 13,204.00
-4 BMY 22SEP12 34.0 C 0.13 (53.43)
( 09/21/2012 +4 BMY 22SEP12 34.0 C 0.00 0.00 )
( Post-August Profit/(Loss): 53.43 )
1000 GE GENERAL ELECTRIC CO 20.71 20,710.00
-10 GE 22SEP12 20.0 C 0.83 (827.26)
( 09/19/2012 +10 GE 22SEP12 21.0 C 2.49 2,473.49 )
( Post-August Profit/(Loss): (1,646.23) )
200 RIG TRANSOCEAN LTD 49.03 9,806.00
-2 RIG 22SEP12 50.0 C 1.12 (224.17)
( 09/21/2012 +2 RIG 22SEP12 50.0 C 0.00 0.00 )
( Post-August Profit/(Loss): 224.17 )
CE CELANESE CORP 38.26
-3 CE 22SEP12 30.0 P 0.01 (3.72)
( 09/21/2012 +3 CE 22SEP12 30.0 P 0.00 0.00 )
( Post-August Profit/(Loss): 3.72 )
EMR EMERSON ELECTRIC CO 50.72
-2 EMR 22SEP12 35.0 P 0.00 (0.01)
( 09/21/2012 +2 EMR 22SEP12 35.0 P 0.00 0.00 )
( Post-August Profit/(Loss): 0.01 )
NSC NORFOLK SOUTHERN CORP 72.46
-2 NSC 22SEP12 60.0 P 0.00 (0.59)
( 09/21/2012 +2 NSC 22SEP12 60.0 P 0.00 0.00 )
( Post-August Profit/(Loss): 0.59 )
V VISA INC 128.25
-1 V 22SEP12 90.0 P 0.00 (0.00)
( 09/21/2012 +1 V 22SEP12 90.0 P 0.00 0.00 )
( Post-August Profit/(Loss): 0.00 )
300 WAG WALGREEN CO 35.76 10,728.00
-3 WAG 20OCT12 33.0 C 3.14 (940.89)
DD DUPONT AND CO 49.75
-2 DD 20OCT12 40.0 P 0.10 (20.29)
INTC INTEL CORP 24.83
-5 INTC 20OCT12 25.0 P 0.99 (494.90)
SNDK SANDISK CORP 41.22
-3 SNDK 20OCT12 35.0 P 0.55 (164.04)
STX SEAGATE TECHNOLOGY PLC 32.01
-4 STX 20OCT12 28.0 P 0.76 (303.14)
UPS UNITED PARCEL SVC INC 73.81
-2 UPS 20OCT12 60.0 P 0.06 (12.47)
COP CONOCOPHILIPS 56.79
PSX PHILLIPS 66 42.00
-2 COP1 17NOV12 60.0 P 0.22 (43.43)
HES HESS CORP 50.53
-3 HES 17NOV12 40.0 P 0.48 (145.47)
MDT MEDTRONIC INC 40.66
-4 MDT 17NOV12 29.0 P 0.11 (44.41)
CREE CREE INC 28.20
-5 CREE 22DEC12 15.0 P 0.14 (68.97)
DOW DOW CHEMICAL CO 29.31
-4 DOW 22DEC12 25.0 P 0.62 (248.12)
NE NOBLE CORP 38.14
-3 NE 22DEC12 30.0 P 0.66 (199.08)
POT POTASH CORP 41.07
-3 POT 22DEC12 32.5 P 0.50 (150.20)
TIE TITANIUM METALS CORP 12.24
-5 TIE 22DEC12 10.0 P 0.29 (142.82)
TM TOYOTA MOTORS CORP 79.62
-2 TM 20OCT12 55.0 P 0.01 (2.47)
200 CSE CAPITALSOURCE INC 6.93 1,386.00
-2 CSE 19JAN13 7.0 C 0.43 (85.02)
200 PG PROCTER & GAMBLE CO 67.19 13,438.00
-2 PG 19JAN13 67.5 C 2.04 (408.53)
400 WM WASTE MANAGEMENT INC 34.58 13,832.00
-4 WM 19JAN13 37.0 C 0.41 (164.21)
CMI CUMMINS INC 97.11
-2 CMI 19JAN13 45.0 P 0.21 (42.14)
HON HONEYWELL INTL INC 58.45
-3 HON 19JAN13 40.0 P 0.38 (114.47)
MMM 3M CO 92.60
-2 MMM 19JAN13 55.0 P 0.13 (26.60)
UTX UNITED TECHNOLOGY CORP 79.85
-2 UTX 19JAN13 50.0 P 0.41 (82.69)
A AGILENT TECHNOLOGIES INC 37.16
-4 A 16FEB13 25.0 P 0.49 (194.81)
CAT CATERPILLAR INC 85.33
-2 CAT 16FEB13 60.0 P 1.13 (226.38)
PH PARKER-HANNIFIN CORP 79.98
-2 PH 16FEB13 60.0 P 1.69 (337.73)
STT STATE STREET CORP 41.60
-3 STT 16FEB13 30.0 P 0.57 (169.59)
IR INGERSOLL-RAND PLC 46.76
-4 IR 16MAR13 25.0 P 0.31 (125.13)
JPM JPMORGAN CHASE & CO 37.14
-4 JPM 16MAR13 25.0 P 0.54 (215.80)
UNH UNITEDHEALTH GROUP INC 54.30
-3 UNH 16MAR13 40.0 P 0.95 (283.94)
400 VZ VERIZON COMM INC 42.94 17,176.00
-4 VZ 20APR13 43.0 C 2.04 (815.63)
LOW LOWE's COMPANIES INC 28.48
-5 LOW 20APR13 20.0 P 0.56 (278.17)
MAR MARRIOTT INTL INC 37.68
-4 MAR 20APR13 29.0 P 1.05 (418.42)
200 TSM TAIWAN SEMI-SP ADR 14.70 2,940.00
-2 TSM 18JAN14 15.0 C 1.70 (340.37)
34 DYNIQ DYNEGY INC 0.49 16.66
100 FTR FRONTIER COMM CORP 4.62 462.00
Subscribe to:
Posts (Atom)