Can you write a put option without sufficient funds to meet the potential obligation?

Question

When writing a put option does your account have to be funded so that if the buyer exercises the right to sell you can meet your obligation, or can you write the put option without the funds to meet the potential obligation?

Thanks

Answer 1

There is no standard answer to this question. It will depend entirely on what kind of options activities your broker offers and what your broker has approved your specific account for. Consider:

• Most brokerage accounts, by default, don't permit options trading at all. You typically need to ask/apply for it.

• Even with options trading, many brokers, by default, only permit common limited-risk strategies like buying puts and calls, and nothing riskier or more complicated, again, until you ask/apply for it. My own broker required me to answer a few short questions about the risks of certain option strategies before approving my account for writing puts.

• Even in providing access to writing options, brokers are likely to require a covered position. Some brokers don't permit any naked option writing.

• Even if a broker does provide naked writing, they are still likely to require some cash collateral or sufficient equity margin in your accounts, and it may vary from one place to the next, from one customer to the next, from one underlying security to the next, from one exchange to the next.

Here's one example of one broker's option trading levels and margin requirements. Of course, your broker will vary, so call your broker for a specific answer.

Answer 2

No, margin rules for options are the most strict of all marketable securities. Of course, I'm all but sure that once marketable credit default swaps get going full steam, options'll be outshined.

Option margin is governed by Regulation T, but exchanges, brokers, etc can apply stricter rules. Here's a short list with the complete CBOE margin manual: http://www.themargininvestor.com/option-strategies---reg-t-margin.html

Per the specifics of your question, if you write a naked put, you must maintain 100% of the value of the put in the market + 15% of the broad index's value or 20% of the narrow index's/single stock's value.

Your put isn't considered naked if you have 100% of the exercise price in cash, 1 short underlying for every put (remember that options trade in round lots of 100 so 100 shares for each security since each security options 100 underlyings), or a put with the same underlying at a higher exercise price dated >= the shorted put.