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Let's say that I have $50k in my brokerage account. My broker will let me buy double my account's value on margin. I can buy 100 shares of TSLA at $820 per share and then sell a one year covered call with a strike price of $850 for $15k of fat premium.

I have a personal loan for $15k. I have been using my trading account to make the monthly payment. What if I withdraw the $15k premium and pay off the loan? By doing so, I would pay the loan off faster, save on the interest and I wouldn't have the pressure to make money on a weekly or monthly basis for the loan payment and I can just let money sit in TSLA shares until I close the covered call or it expires in a year.

What are the pros and cons of doing this? The stock can drop below my buy price and stay there longer but in that situation the option's premium would lose its value too. My broker said that I won't get a margin call as long as I have enough to cover 50% of the shares cost. The worst case scenario is that I might have to add $5-10K more if the stock continues to tank. If stock goes up then I can close the covered call and sell my shares when I break even or even profit.

I know I can always take the money out from my account without doing all this and pay the loan off but I wonder if my plan would work or not. Please let me know your thoughts.

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  • "My broker said that I won't get a margin call". note that brokers also say: "We can and will change our mind absolutely any time we like about margin, and, you've signed a dozen documents saying you understand that."
    – Fattie
    Feb 14, 2021 at 15:44
  • @Fattie - That's a good point. A month ago, Schwab and Ameritrade changed the status of GameStop to “non-marginable” which meant that traders couldn’t use GME as collateral for margin loans. Rut roh.
    – Bob Baerker
    Feb 14, 2021 at 20:56
  • Intriguing. For the question here, I have to wonder in broad general terms if OP should be mucking about at that level :/ I don't think I'd take on an 80k bet if I was tooting about with a 15k loan :/ (And I've certainly been at the "15k loan crisis" level :/ )
    – Fattie
    Feb 14, 2021 at 23:41

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You have two separate issues and you are conflating them. You have a $15k personal loan and you are considering a TSLA covered call. One has nothing to do with the other.

The real questions are:

(1) Whether doing a covered call on TSLA is a good idea
(2) Whether you have sufficient assets to support the margin loan.

The answer to (1) is that you'll know that by the end of the year.

The answer to (2) is a bit tricky because your statement that you confirmed with the broker and I won't get a margin call as long as I have enough to cover 50% of the shares cost is a bit iffy. Reg T long margin is 50% with a maintenance margin requirement (MMR) of 25% (brokers may require more). If your broker is saying that his MMR is 50% then you barely have enough to cover the margin ($35k remains after paying off the loan with a margin purchase of $67k therefore you have a buffer of $1.5k).

Given TSLA's price movement over the course of the past year (share price dropped by more than half), it's definitely not true that Worst case scenario I may have to add $5-10K more if the stock continues to tank.

Another factor is that when you buy on margin, you pay an annual margin interest rate on the borrowed money which would be $32k times the borrow rate which is in the vicinity of 8-10% at the major discount brokers other than IBKR.

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  • "The answer to (1) is that you'll know that by the end of the year." :) I am going to start bountying these :)
    – Fattie
    Feb 14, 2021 at 15:42
  • And on whose head are you going to put a price? ;->)
    – Bob Baerker
    Feb 14, 2021 at 15:45
  • Thanks for the sanity check, another thing that's unclear to me is whether I am allowed to withdraw the premium of 15K as a cash out as soon as I get a credit for selling a TSLA covered call. Any idea about that one or should I ask broker about it first?
    – JohnZee
    Feb 14, 2021 at 16:53
  • Cash is fungible. I doesn't matter whether the cash came from selling the covered call or it's cash that was already in and is coming from your account. What does matter is that you have to be able to maintain the margin requirement for the position. I'm hesitant to say that this applies to all brokers because occasionally there are outliers than behave differently (like Robinhood in some situations). Regardless, ask your broker about this. Also ask him what his firm's margin maintenance requirement is.
    – Bob Baerker
    Feb 14, 2021 at 18:17
  • Thanks all for sharing your wisdom.
    – JohnZee
    Feb 14, 2021 at 20:24

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