How does margin really work?

[ammulder]

Let's say I wanted to sell some puts periodically, hoping to make some cash without selling shares.

Right now I have next to no spare cash in my brokerage account. Because, you know, I used it buying TSLA!

I think I have heard people recommend selling out of the money puts on margin, when you expect them to never be exercised, such that you're taking advantage of the fact that you have margin but not actually paying interest unless the puts execute.

I had the vision in my head that I would sell, let's say, a $500 put, for which I'd normally need $50K of cash, and the broker would use my TSLA shares as collateral so I wouldn't need any significant cash in my account and they'd just deposit the premium from the sale in my account and then I'd cross my fingers that TSLA stays up. If the put got exercised then my margin would essentially convert to a loan and I'd start paying interest.

But when I go and poke around at ETrade, it seems like you can't sell a put entirely on margin -- it appears that you would sell for some fraction like 30% cash and 70% margin, or maybe vice versa, their calculator is very unclear to me.

How is this really meant to work? If I want to sell a put with a $500 strike and thus a potential exercise value of $50K, how much cash should I expect to need in my account? (Does everyone recommending this strategy have gobs of cash sitting around in their brokerage accounts which is NOT invested in TSLA?)

 

[long0036]

Let's say I wanted to sell some puts periodically, hoping to make some cash without selling shares.

Right now I have next to no spare cash in my brokerage account. Because, you know, I used it buying TSLA!

I think I have heard people recommend selling out of the money puts on margin, when you expect them to never be exercised, such that you're taking advantage of the fact that you have margin but not actually paying interest unless the puts execute.

I had the vision in my head that I would sell, let's say, a $500 put, for which I'd normally need $50K of cash, and the broker would use my TSLA shares as collateral so I wouldn't need any significant cash in my account and they'd just deposit the premium from the sale in my account and then I'd cross my fingers that TSLA stays up. If the put got exercised then my margin would essentially convert to a loan and I'd start paying interest.

But when I go and poke around at ETrade, it seems like you can't sell a put entirely on margin -- it appears that you would sell for some fraction like 30% cash and 70% margin, or maybe vice versa, their calculator is very unclear to me.

How is this really meant to work? If I want to sell a put with a $500 strike and thus a potential exercise value of $50K, how much cash should I expect to need in my account? (Does everyone recommending this strategy have gobs of cash sitting around in their brokerage accounts which is NOT invested in TSLA?)

Hi, i came across your post and wanted to ask, have you started selling puts on tesla as i would like to find out your experience,thanks!

 

[ammulder]

Well, I discovered that my experience described in the first post here was a temporary problem, and it just took a couple days for margin to start working properly once it was enabled for my account.

I have been selling puts, which has worked out well on the whole, though not as well as it would have been without that 900->600 bloodbath. Anyway, you should look at the Wheel thread here for much more detail on people selling puts and calls.

 

[long0036]

Well, I discovered that my experience described in the first post here was a temporary problem, and it just took a couple days for margin to start working properly once it was enabled for my account.

I have been selling puts, which has worked out well on the whole, though not as well as it would have been without that 900->600 bloodbath. Anyway, you should look at the Wheel thread here for much more detail on people selling puts and calls.

I am using Interactive brokers and have around 200 tesla shares in my account. I am looking to sell uncovered puts.

Therefore, could i ask the following questions:-

1) If i sell put and the price goes below strike price before expiry, will the brokerage automatically liquiduate my 200 tesla shares? Do i have the luxury to wait until expiration date before something happens or can the buyer of the put option exercise the contract before the expiration, say 1 week after my trade trade (i am looking to sell put for 45 days).

2) Also wanted to ask, if on expiration date, the put option goes below the strike price, will my brokerage force me to buy the underlying stock or can i close my contract on the expiration date and just "pay the difference" without having to have the underlying stock which is tesla?

Thanks!

 

[adiggs]

I am using Interactive brokers and have around 200 tesla shares in my account. I am looking to sell uncovered puts.

Therefore, could i ask the following questions:-

1) If i sell put and the price goes below strike price before expiry, will the brokerage automatically liquiduate my 200 tesla shares? Do i have the luxury to wait until expiration date before something happens or can the buyer of the put option exercise the contract before the expiration, say 1 week after my trade trade (i am looking to sell put for 45 days).

2) Also wanted to ask, if on expiration date, the put option goes below the strike price, will my brokerage force me to buy the underlying stock or can i close my contract on the expiration date and just "pay the difference" without having to have the underlying stock which is tesla?

Thanks!

Primary response - I suggest looking for the Option Alpha option education link on page 1 of "the wheel" thread. There are three chunks of videos in there; I think of them as (1) option basics (your questions), (2) getting into a trade, and (3) getting out of a trade.

I consider that to be the basic information anybody should have before doing anything with options.


That being said:
1) When selling a put, if the share price is lower than the put strike price, then the brokerage will use your cash (or margin) to purchase shares -- 100 shares per contract. I.e. - as the put seller, shares will be "put" to you. You almost always have the luxury of waiting until the expiration date - what you really have the luxury of waiting for is ~0 extrinsic or time value remaining.

2) You can buy out the position any time using a Buy To Close order. You'll be paying the value of the position at that time, leaving you with an overall realized gain or loss. You can BTC the position any time up until the end of business on expiration day. There are very good reasons to not wait that long.


Refer back to Primary response