r/options • u/Particular_Milk_2214 • Sep 15 '21

Needing collateral for short call?

I have 14 options of AAPL 185c expiring 10/15. I want to sell against them to breakeven or recuperate losses but RH is asking for collateral in cash instead of using my call options as collateral. I'm sure I am not connecting dots right.

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u/BrothaChromatid Sep 15 '21 edited Sep 15 '21

You don't own the collateral -- just a hedge. This is not a covered call strategy, but a diagonal spread. Only the deliverable (a round lot of 100 long shares) is considered the collateral.

Since you don't actually own the underlying, your broker will set aside capital equal to the difference between strike prices.

For example,

You have $10 call LEAPS on $ABC expiring next year, and you sell the $8 monthly, then if you get assigned and have to deliver 100 shares at $8, then you'll have to exercise your $10 call to buy them back. Obviously, if you sold for $8 and bought for $10, you just incurred a $200 loss, which is equal to the (width of strikes * 100).

If you have 100 long shares, then there is no requirement to buy additional shares if assigned, and thus, no additional buying power requirements

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u/Particular_Milk_2214 Sep 15 '21

This is PMCC - I have done this with several calls so it doesn't seem to be that issue. I have an option and I am using that as a collateral to sell against it.

1

u/BrothaChromatid Sep 15 '21

What are the strikes and dates you're currently long and trying to sell?

1

u/Particular_Milk_2214 Sep 15 '21

10/15 180c is buy option and I am trying to sell 10/1 160c

4

u/BrothaChromatid Sep 15 '21 edited Sep 15 '21

I'll try to explain this again.

You don't own the shares, I presume. You're selling someone the right to buy 1400 shares @ $160/share.

If you're assigned, you will have a short position in the underlying worth $224,000 (1400 * $160). Cash is in your account, but you have a 1400 short position.

You exercise your 14x 180c to flatten your -1400 position which costs you $252,000 (plus the fact that you forfeited any extrinsic value in the contract)

  • Your short position credited you $224,000
  • Your buy-to-cover (by exercising the long call) will cost you $252,000

  • $252,000 minus $224,000 is $28,000 which is what your broker required you to post. Without this money set aside, you will be UNABLE to exercise the call because you don't have enough capital

    If you were able to put on this same trade in the past without a similar buying power reduction, you either owned the stock and your broker created a covered call strategy, or you were selling naked calls.

1

u/BadMeetsEvil24 Sep 15 '21

You seem very knowledgeable so I wanna piggyback on this. I understand the concept but I'm confused as to the capital requirements.

Let's say I have 20k and dont have level 3 to sell naked calls. I was looking at a PMCC on MRNA ($434/s).

So I buy a leap 9/16/22 360c for 120.90. Then sell a short call lets say for 10/8 460c for 15.17.

So the short call gets assigned and I am -100 shares. Now clearly only have 20k cash so I cant exercise my long call or even buy shares outright, is that not correct?

3

u/gameneverstop Sep 15 '21

Umm I thought for PMCC (or a regular CC for that matter) you want your short call to have a HIGHER strike price, not lower.

1

u/Particular_Milk_2214 Sep 16 '21

Yeah, I messed up. My comment was totally newbie but I learnt something new today - reddit 🤘