Writing options on a margin loan

[Arakasi]

I've had a margin loan for some years and recently decided to look into options trading. I wanted the ability to write put and call options so I could either "rent" some of the shares currently in my margin loan portfolio or write put options for a parcel of shares I want to buy through my margin loan at at price I beleive is "good" value and earn income on them until they reach that price and I am exercised against.

However, I've been told by ANZ/Etrade that I cannot write options through a margin loan with them through ANZ, so I am considering Commsec as they've indicated they can do this.

Has anyone here had experience in writing options through CommSec (or ETrade!) through a margin loan?

Does writing a call covered call option have any impact on the margin loan from a margin perspective (other than the premium being deducted from the loan and the cost of the writing a contract being added to the loan)?

Cheers

 

[builder2818]

You aren't another brainwashed 21st century academy member are you?

If you're going to sell naked put options, you cannot do this on your margin loan and you will need to be able to cover the ACH daily margins which with commsec and etrade, they automatically double what the ACH require off you. Selling naked puts - a stupid strategy pitched to people at wealth creation seminars.

If you write covered calls through commsec, you need to setup the options account to specify where you want the premium to be deposited i.e in your cash account or in your margin loan account. You cannot allow the cost of the options contract to be added to the margin loan.

Commsec, like every other broker, lodges your stock as collateral when you write a covered call. Your LVR will be calculated on the amount of the strike price you wrote the option at if you were to be exercised. You will still be liable for a margin call if the stock falls far enough to warrant one.

If you are thinking about doing a Collar (i'm sure Jamie has some other term to describe this), with Commsec you will have to buy your long put through a different account to your covered call account as Commsec has different levels of options trading accounts for users and judging by your thread, I don't feel like you would pass their questionnaire to get a level 3 and 4 trading account to write short puts.

 

[BradK]

Yes, whenever I see the word 'Rent' ... 21st Century Academy!!! and alarm bells begin to ring...

There seems to be heaps of it around at the moment... Have they made a resurgence??? Surely heaps of their cc holders would have been wiped out in the last correction??

My friend, go and have a long lay down until the thought goes away.

Tate, Bedford, Wayne L.... read some proper stuff my friend, or be prepared to LOSE LOTS OF MONEY!!!

Brad

 

[Arakasi]

"You aren't another brainwashed 21st century academy member are you?" Nope. I simply used the term rent to avoid confusion about what I was trying to do. It appears it was a poor choice of word on this forum I have read some of WayneL's stuff, very informative and am continuing to read more.

I am simply trying to better understand the requirments and mechanics of placing options trades through a margin loan.

I think my first issue comes from differences in terminology. I want to do two things:

1) Write covered call options over stock I already have in my margin loan portfolio to generate some income.
2) Write put options over stock I wish to buy at a certain price so that I generate income over that stock until such time as it reaches that price and I am exercised against.

The ASX options booklet referes to writing options but the ETrade site asks the user to select buy or sell for short or long calls or puts. I gather that, selling a short call is the same as writing a call and selling a short put is the same as writing a put. Hence the terminology issue.

I also don't know what the impact on the margin loan is of selling a short call or put. With the short call I had hoped it wouldn't affect the Margin Loan as I am already covered with the underlying stock (not sure if I have to specify this somehow through the site at the time of the trade). With a short put I expect I'll have to stump up some cash from my margin loan (not sure how much though) to cover the option margin and any further margin which the lender requires.

So I was hoping that others who have used these strategies could provide some information on the mechanics.

 

[wayneL]

. Selling naked puts - a stupid strategy pitched to people at wealth creation seminars.

If you write covered calls through commsec

Covered Call = Naked Put

They are synthetically equivalent.

 

[Arakasi]

Covered Call = Naked Put

They are synthetically equivalent.

Thanks WayneL, I've read through several of your threads and came across this point. However, I understand that writing a naked put will not give me access to the dividends, hence my preference for a covered call.

I mostly buy and hold blue-chips with decent dividend yeilds and re-invest dividends and regular savings to keep building my holdings. I hope to use covered calls to supplement the dividends on a couple of my stocks. I have no delusions of X% per month returns from CC's or making easy money.

From builder2818's post it appears I may not be able to write naked puts through a margin loan (CommSec or ETrade) so I'll have to focus on covered calls for now.

Next step, trying to figure out how to actually place a covered call order through an ANZ margin loan with ETrade.

 

[mazzatelli]

Thanks WayneL, I've read through several of your threads and came across this point. However, I understand that writing a naked put will not give me access to the dividends, hence my preference for a covered call.

Please read up on put-call parity and arbitrage.

 

[wayneL]

Thanks WayneL, I've read through several of your threads and came across this point. However, I understand that writing a naked put will not give me access to the dividends, hence my preference for a covered call.

There is still no difference, the synthetic relationship is still maintained when the stock goes ex dividend.

Some scribblings from the past:

The fifth input into the Option Pricing Model is dividends. If the underlying pays no dividend, then there is no effect on option prices. However if the stock does have an upcoming cash dividend payable, it will have an effect on option prices. It is very important to be aware of this, as many a neophyte option trader has been caught out by thinking an arbitrage opportunity existed with mis-priced options, when in fact the pricing anomaly was due to an upcoming dividend; hence not an anomaly at all.

The reason for this is that option holders are not entitled to participate in cash dividends, so option prices must compensate.

It is a general rule of thumb that the underlying stock will drop by the dividend amount when the stock goes ex-dividend, all things being equal. As far as the stockholder is concerned, he/she ends up squits; what is lost on the stock, is gained in cash.

Option Pricing Formulae account for this by considering the move in the underlying due to going ex-dividend.

When the stock is cum-dividend, call option prices will be cheaper than they would be if there were no dividend payable, reverting to “no-dividend” pricing on the ex dividend date. This has the effect of shielding the call option holder from an unwarranted loss due to the drop in the underlying.

The reverse is true for put options. When the stock is cum-dividend, put prices will be more expensive than they would be if there were no dividend payable, reverting to “no-dividend” pricing on the ex dividend date. This has the effect of ensuring that the put holder doesn’t receive an unwarranted windfall profit.

In a Nutshell
When a dividend is payable:

Call option prices will be cheaper.
Put option prices will be more expensive.

 

[Arakasi]

Thanks for the information. I've got a book called "Options As a Strategic Investment" by McMillan on the way which will hopefully provide a good reference source.