Question

: An investor writes five naked put 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 = $6300

Reason -

The initial margin for writing a naked put 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 exercise price

In present case because the option is $3 out of the money, so the first calculation gives,

500 * ( $8 + $38 *0.2 - 3)

= 500 * ( $8 + $4.6 )

= 500 * $12.6

= $6300

The second calculation gives,

500 * ( $8 + $35 * 0.1 )

= 500 * ( $8 + $3.5 )

= 500 * $11.5

=$5750

As the first option is greater, margin requirement will be $6300.