I think I've got this figured out, but I just want to make sure I don't get hit with a surprise margin call because I was an idiot. I've been writing cash-secured puts for a while now and had good results. I write puts at the money for the next expiring month, the Monday after the previous month's expiration date. I know it can be hazardous in a bear market, and I'm keeping that in mind, but it's a risk I'm happy to take since the basic mechanism of time decay is always on my side.
So, I'm thinking of experimenting with naked puts, since I've had such consistent success with this. I'm just having trouble understanding the margin requirement. The maintenance requirement listed for E*TRADE is:
Proceeds of the sale plus 20% of the underlying value less out of the money amount OR
proceeds of sale plus 10% of strike price, whichever is greater.
So let's say I want to go short 10 F Oct '10 $10 puts. Premium is 14 cents, so the sale proceeds portion of the maintenance requirement is $140 for ten contracts. Now I have to consider the two possible conditions. Here's where I'm not sure: is the "underlying value" the market price, or the theoretical value given by analysis? The theoretical value given by their analysis tool is 3 cents, but the option is $1.80 out of the money, so that would come to zero, leaving me with a total margin requirement of $140. However, 10% of the strike price would be $1,000, making the requirement under the second condition $1,140. So my margin requirement is $1,140, and all I would need going into it was $1,000.
However, the margin maintenance requirement is also the same. So if $1,140 was all the cash I had in the account, and the value of the option were to rise from $0.03 to over $1.00 due to a stock price decline, then my maintenance requirement would go over $1,140 and I would face a margin call, forcing a buy of 10 puts to close the position.. meaning that I would have just lost at least $1,000, less the $140 premium received.
And of course, if the options were exercised at any time, it would be an instant margin call to the tune of about $9,000 and I'd have to sell the stocks immediately.
![EEK!](https://pics3.city-data.com/forum/images/smilies/eek.gif)
But if they expire worthless, then I've just returned 14% in a single month.
Have I got things right? I'm not saying I plan to take on that kind of risk, just trying to understand the fundamentals.