Options Forum: Put-Selling Margins

Returning to the reader's question (you thought I was drifting off course, didn't you?) will provide a more accurate assessment of a position's return. To begin with:

The margin requirement for selling an uncovered or "naked" put is the greater of 1) 20% of the stock price plus the put premium less the amount that the put is out of the money, or 2) 10% of the stock price plus the put premium.

In the XYZ example above, the margin requirement equation is (0.20 x 47 + 1.50) -2 = 8.90, or $890 per put sold. (The latter formula results in a requirement of just $620, which is obviously the lesser of the two, and therefore not applicable.)

Use the margin requirement as the basis for calculating the return on investment, or ROI, for the position. In our case, assuming the put expires worthless, the ROI would be 16.8%, which is derived from dividing the profit by the initial margin requirement ($150/$890). Remember that this was achieved in just a seven-week period and there is no reason or purpose for annualizing the return. Still, even without annualizing, this illustrates the leverage of options and the power of time decay.

To achieve a similar return through buying the underlying shares would have required $2,350 of initial capital (100 shares at $47 with a 50% margin requirement) and XYZ to climb by $3.95, or 8.4%, to $50.95.

This past article offers a discussion and some examples of how to employ selling puts as a means of establishing a bullish position.

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