Monday, March 8, 2010

Re: [TheOptionClub.com] Worst Case Margin

 

Yes, that is correct.  Once you enter the trade - in the scenario described below, no matter where the market is, you now have $7560 of trading capital available also called Buying Power effect (Reg-T margin calculations). The brokers "locks up" your max loss as margin.


And this would a good example of why you may not want to be hold naked shorts.

So you have no holes in your understanding but if this scenario does indeed happen, you sure will have a hole in your pocket :-).

Murthy



On Mon, Mar 8, 2010 at 12:04 PM, asdfffg1 <joshuas7@hotmail.com> wrote:
I want to understand the details of a market crash as it relates to margin requirements. Up until now, I only understand the concept of a crash. Below is an example of what I 'believe' it means. For those who know, please fill in the holes of my understanding.

For Example
This past Friday, the June 2010 E-mini S&P contract had daily movement around 1130 going into the close. In the last few hours of Friday's trading hours, we sold a ES June 2010 credit spread consisting of one short June 925put for $280, and the purchase of one June 900put for $220. This gave us a $60 credit. Lets say tonight, the ES market will tumbles in the globex session. Tomorrow morning, (Tuesday) we turn on the computer at 930AM where we observe the S&P market has plummeted to 800. Our largest possible dollar loss, after this devasting move, would be $2500, minus the $60 credit. If the trade would have been placed last Friday, with a $10000 margin account, what would be the absolute largest amount required for margin. It can't be more than $2500 can it? Thanks for the help.




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The goal of TheOptionClub is to provide a forum for members to work together for the purpose of furthering our individual understanding option trading.  All messages and postings, and any materials circulated are provided for discussion and educational purposes only.  No statement contained in any materials from TheOptionClub should be considered a recommendation to buy or sell a security or to provide investment, legal or tax advice.  All investors are encouraged to consult a qualified professional before trading in any security.  Stock and option trading involves risk and is not suitable for most people.  There is no guarantee that any information provided is accurate and, may in fact, be wrong.  It is understood that the participants in TheOptionClub have varying backgrounds and degrees of experience in option trading, and that regardless of experience each member is considered a student.  As such, any information distributed through TheOptionClub should be considered with a critical mind and not relied upon as an authoritative source.

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