Walmart stock is currently trading at $95 per share. A call option on Walmart with an exercise price of $80 is trading at $17.50. Tessa wants to sell a call option on Walmart without actually owning the stock, how much margin will you be required to put?
Answer: In a short sale, investors sells the stocks at higher price and buys it back at lower price and difference is the profit.
Call option- It is bought when investor is bullish towards a particular security or index.
Shorting call option- If an investor is bearish towards a particular stock, he sells the call and when call comes down and expires, he get the profit, his profit is limited to the premium received in selling call option.
In this strategy, he sells a call of Walmart of strike price 80 at $17.50, he needs to deposit 150% margin in short position, short position is risky because risk is unlimited and gain is limited.
Total margin required in shorting the Call: 80 * $17.50 * 150% = $2100
100% full margin and additional 50% margin
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