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I have two closely related questions about what happens when I write a naked option.

My understanding of short-selling a stock is that as long as the short position is open, my brokerage will (or might, at least) charge interest on that position. (This answer implies that interest is usually charged on the value of the borrowed stock, but this question seems to suggest that interest on short stock positions is uncommon.)

How about writing options? If I have a naked short position in an option, will my brokerage charge any interest on that position?

Likewise, my understanding of stocks is that when you sell short, you're not allowed to invest the proceeds from the sale; you have to hold them in your account as cash. If the value of the stock drops below the price you sold it at, then cash is "released" from the position. (I'm not sure if the opposite happens—cash being absorbed when the price goes up—but that's not what I'm asking about right now.)

Does the same go for writing options? If I write a naked option, do I have to hold the proceeds as cash just like with a short sale, or am I free to invest the proceeds?

(I'm guessing that the interest charges and the restrictions on uncovered options must be similar to the charges and restrictions for short positions in stocks. Otherwise, there would be little reason to ever sell a stock short; people could write deeply in-the-money call options instead.)

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When you short a stock, you are charged a borrow rate (interest). The rate can fluctuate daily and the amount owed accrues daily. You pay a borrow rate on all short equity positions. If your broker pays you interest on your cash balance, you'll earn interest on the proceeds of the short sale (many don't). Note that the borrow rate can be as low as 0.25% and in rare cases, 500-600% or more.

Initial Reg T margin for shorting non leveraged equities is 50% and the minimum margin maintenance requirement is 25% (brokers can require more). The proceeds from the short sale are yours to do as you wish as long as your account has enough cash and marginable securities to meet the MMMR (major brokers). It is possible that some rinky-dink brokers restrict the cash proceeds but I am unaware of it.

The margin required for a short position varies according to the stock's price. As it moves against you and rises, your short position requires more margin. If it moves down, the margin requirement drops and cash is released in the form of SMA.

The margin requirement for naked options has a complex formula but to keep it simple, it's about 20%. Similar to above, the cash is yours to with as you wish, as long as you meet the MMMR. There are no interest charges on naked options.

Selling deep ITM naked calls is a substitute for shorting stock but it has a few drawbacks. They tend to be illiquid with with B/A spreads. Also, as the stock drops, the call's delta is going to start decreasing and the amount that you make per dollar of stock drop is going to diminish.

  • "The proceeds from the short sale are yours to do as you wish" – Does that apply to stocks too or only options? Here's where I got the information that proceeds from short selling stock must be held as cash: investopedia.com/ask/answers/05/shortmarginrequirements.asp "At this time, the proceeds of the short sale must remain in the account; they cannot be removed or used to purchase other securities." – Tanner Swett Nov 21 at 18:11
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    "You pay a borrow rate on all short positions." – Just to confirm, that applies to options too, not just stocks? It seems weird that I'd pay something called a "borrow rate" for writing an option, since I'm not borrowing it from anyone. – Tanner Swett Nov 21 at 18:13
  • I think this is an issue of unclear wording on my part. The mar req for shorting 150% of the value of the short sale at the time the sale is initiated (the full value of the short sale proceeds plus the margin requirement of 50% of the value of the short sale). So if sold on full margin, you can't remove the proceeds (shorting $10k of stock with $5 in account).But if you had say $25k of long marginable securities and cash in account and you did the same short, 1/2 of the short sale proceeds could be used because the margin requirement is only $5k. Either way the margin requirement is $5k. – Bob Baerker Nov 21 at 18:36
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    No, borrow rate only applies to short selling equities – Bob Baerker Nov 21 at 18:39
  • I think that makes sense, thank you! If you like, remind me in a day or two to come back and accept an answer. – Tanner Swett Nov 21 at 19:50

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