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# The Return of the Margin Monster

HAVING TROUBLE PRINTING?

By Robert John Ogilvie

An investor may receive a copy of the Characteristics and Risks of Standardized Options by accessing this hyperlink:

Just in case you missed the previous article, I will repeat the calculations for the margin requirement. The calculations are in depth. But as investors, you should be aware of how much these positions cost to hold. The margin requirement changes with the price of the underlying security as well as the option sold. In addition, the margin maintenance is set by the brokerage firm and may be higher than the requirement set by the regulatory agency. To determine the margin requirement if the maintenance is 20% and 10%, take the greater of 20% of the current price multiplied by the number of shares less any out of the money plus the premium or 10% of current price multiplied by the number of shares plus the premium. To illustrate, lets assume we want to write 5 contracts of the May '00 130 Calls on an \$100 stock. Let's also assume the premium is \$2.50. First multiply the stock price (\$100) by 1000 (5 contracts X 100 shares per contract) and then by 20% to get \$10,000 (\$100 X 500 X 0.20 = 10,000). Then add the premium received of \$1,250 (\$2.50 X 5 contracts X 100 shares per contract). The current total is \$11,250 (10,000 + 1,250). Then subtract the amount the stock is out of the money which is \$15,000 (130 - 100 = 30 points out of the money X 5 contracts X 100 shares per contract) from the previous number (\$11,250). The total is -\$3,750 (\$11,250 - 15,000). Obviously, they won't let us get away with not providing any collateral. Unfortunately, we have to calculate the 10% method because we can't have a negative requirement. Multiply the \$50,000 by 10% to equal \$5,000 and add the premium of \$1,250 to total \$6,250. We have to use the greater of the two calculations, which is \$6,250.

The point at which an investor decides to close out the position depends upon the investor's risk tolerance, objectives, goals, speculation level, future outlook on security, etc. An alternative to uncovered call writing is the Bear Call Spread or the Call Credit Spread. This provides some upside protection against the stock. I will embellish on this strategy in my next article. If you have any additional questions regarding this article, please feel free to contact me at the e-mail address below.

Robert John Ogilvie

Neither Cutter & Company, Inc. nor Robert J. Ogilvie makes any representation as to the accuracy, reliability or completeness of any charts, formulas, and /or research opinions presented herein. This article is intended solely for educational purposes. Nothing herein should be construed as an offer or solicitation to buy or sell any securities. Cutter and Company is a Member of the NASD, MSRB, and SIPC. Please read the OptionInvestor.com's Disclaimer.

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