Tipping Monkey seems to attract a lot of options traders, and they range from beginners to more seasoned investors. We just received an email from a member inquiring about margin requirements for writing (selling to open) options positions. And after responding to this member`s email, I wanted to write a follow-up article about writing options on Tipping Monkey, and how we calculate margin deposit requirements, since perhaps some of you might be wondering how we compute the margin requirements for writing options.
First of all, I would like to talk about the 4 basic scenarios of writing (sell to open) options:
1. Covered Call Write
Covered Call write refers to selling call options against underlying stock that you already own. For example, you have 100 shares of AAPL, and if you write 1 Call contract against the 100 shares, it is considered a Covered Call Write. It is covered because if the Call option contract is ASSIGNED, you will have the shares available for delivery. This is considered a yield-enhancing move, which places an artificial cap on your upside potential. In general, Covered Call Write is generally considered to be a low-risk hedge because it risk is similar to just holding the stock outright, and if the stock goes down, your actual losses will always be less than just holding the stock.
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