Buy option to avoid a Margin Call?

[nerdzkilla]

Hi,

This is my first ever post on this website.I must say I have learnt alot from this website. I’d like to thank all members for such valuable input to the website and also the aussiestockforum team for such outstanding service.

My question is:
Can I Buy a put option to avoid a Margin Call using a commsec margin loan account?
To further explain myself please see my example below:
I buy $20,000 worth TLS shares using my own cash. Lets say total add up to 100 shares
I buy $10,000 worth TLS shares using my margin loan account. Say 50 shares.
I also buy a put option that expires in a years time and is ATM. There will be enough contracts to cover the 150 shares.

How exactly do i buy the put so a possible margin call is avoided?

my concern is.. if i already have a put and the market crashes..i wont have enough time to sell my put and get out of the margin call. commsec will just sell my shares at a market price and recover their costs.

I rang commsec and the guy on the phone wasnt being clear and was trying to fob me off.
Do you guys know of a brokerage account that will let me do all of the above? Any website/books you would recommend that will help me in the above.

Any help would greatly be appreciated,
Thanks guys

 

[ROE]

Re: Buy option to avoid a Margin Call

Hi,

This is my first ever post on this website.I must say I have learnt alot from this website. I’d like to thank all members for such valuable input to the website and also the aussiestockforum team for such outstanding service.

My question is:
Can I Buy a put option to avoid a Margin Call using a commsec margin loan account?
To further explain myself please see my example below:
I buy $20,000 worth TLS shares using my own cash. Lets say total add up to 100 shares
I buy $10,000 worth TLS shares using my margin loan account. Say 50 shares.
I also buy a put option that expires in a years time and is ATM. There will be enough contracts to cover the 150 shares.

How exactly do i buy the put so a possible margin call is avoided?

my concern is.. if i already have a put and the market crashes..i wont have enough time to sell my put and get out of the margin call. commsec will just sell my shares at a market price and recover their costs.

I rang commsec and the guy on the phone wasnt being clear and was trying to fob me off.
Do you guys know of a brokerage account that will let me do all of the above? Any website/books you would recommend that will help me in the above.

Any help would greatly be appreciated,
Thanks guys

I don't think you can .... with margin call you got 24 hours or less to come up with the cash .... you can exercise your options but that takes T+3 days to settle...or you can sell your put back to the market T+1 but that may not be enough or even with T+1 it may be too late...

unless you can predict the future and exercise your put a few days in advance

 

[notting]

Re: Buy option to avoid a Margin Call

Take the margine call, sell the put, buy tls back with the cash from the put. Pray there is no super fist broadband bribe imposed on the public in between time. That's the best I can do!

 

[skyQuake]

Re: Buy option to avoid a Margin Call

If you're worried about a margin call, the put won't really help you. Esp since you'll be exercising early.

Dump some stock so u can sleep at night.

 

[cutz]

Can I Buy a put option to avoid a Margin Call using a commsec margin loan account?

No you can't, the only option position allowed on your Comsec margin loan account is a covered call, of course this won't help avoid margin call during a meltdown.

BTW, long calls as a stand alone strategy will have similar outcome without the margin worries.

 

[drsmith]

Hi,
I buy $10,000 worth TLS shares using my margin loan account. Say 50 shares.
I also buy a put option that expires in a years time and is ATM.

Margin lenders used to do this as a single product where the cost of the put option was reflected in the loan interest rate. The particular product I'm thinking of was BT Secure Equities from BT Margin Lending.

This though was in the 90's and it may no longer be viable for margin lenders to offer such a product given changes to tax treatment of the put option component and current market volatility.

 

[nerdzkilla]

Thanks everyone for all your help.

I am interested in receiving the dividends on TLS. I’d like to use the cash in my margin loan account to receive extra dividends. But in doing so, I would like to protect myself from big losses.

To further explain myself please see below:

Say I buy 100 shares now each worth $3.15 and also buy a put which is an ATM and expires in a year’s time.

Sometime in march the share price falls down to $2.50 and I receive a margin call.
I take the margin call and let commsec sell my shares to recover their money,
I sell my option and recover most of my losses.

I would not be comfortable taking a loss of over 5% of my total investment

Does the above sound like a good plan?

 

[drsmith]

Does the above sound like a good plan?

Buying put options as a risk minimisation strategy is going to cost money and on the long run, will significantly eat into your returns.

If you are concerned about the risk of forced sell due to margin call, there are two alternatives without the cost of the put options.

1) Don't gear the margin loan anywhere near the maximum gearing level. This reduces the risk of margin call, but obviously, does not eliminate it.

Also, manage the loan. Pay the interest when it coes due each month and use spare cashflow to minimise the loan balance and hence interest.

2) If you have property, borrow against that. Loan interest will typically be less than for margin lending and there's no risk of margin call regardless of share price.

Neither of the above of course offer no protection against a falling share price.

With regard to having all one's eggs all in one basket (Telstra shares for example), someone else can wave the big stick over lack of diversification risk.

 

[silence]

This isn't advice, but if you're specifically looking at TLS, well just look at the likelihood of dividend consistency in the near future (very good), and as such, the risk of the price falling. Quite low imo. As it is, the yield is 8-9%, and a falling price would make this closer to 10% or more - a point at which a lot of people would top up their holdings. I'd love it to fall to about $3 so I could pour a lot of money into it but it's pretty steady where it is now.

Of course there could be some bad news or a deal falling through which means future dividends look shaky, but it's telstra, its one of the most stable blue chips.

Options aren't really worth the cost, especially the time value for one with a year expiry.
The last traded price for a Dec 12 $3.10 call is 21.5c which is about 6.8% of the share price. Add your loan interest of 9.4% (?) and that dividend isn't going to help you very much.



All opinion, and I don't currently hold but have in the past.