Question

An investor writes four naked call option contracts on a stock. The option price is $8, the strike price is $35, and the stock price is $38. What is the margin requirement for the options?

Answer 1

Answer - Margin requirement = $6240

Reason -

The initial margin for writing a naked call option is the greater of -

(1) A total of 100% of proceeds plus 20% of the underlying share price less the amount (if any) by which the option is out of the money

(2) A total of 100% of proceeds plus 10% of the underlying share price.

In present case there's no shortage of money as the stock price is higher than the strike price. so the first calculation gives,

400 * ( $8 + $38 *0.2)

= 400 * ( $8 + $7.6 )

= 400 * $15.6

= $6240

The second calculation gives,

400 * ( $8 + $38 * 0.1 )

= 400 * ( $8 + $3.8 )

= 400 * $11.8

=$4720

As the first option is greater, margin requirement will be $6240