I'm trying to understand how Margin Requirements work when trying to sell a Put Option without having sufficient cash to cover the Option in case it's assigned.
For example, let's say I have $100 worth of equity all paid for (no margin balance) sitting on my account, and no more cash left for use without going into margin territory. I decide to sell a Put (assume at-the-money and a $0 premium for simplicity) that if assigned, would require me to use $100 of margin to buy the underlying.
According to Fidelity, the margin requirement for such a position is as follows:
The higher of the following requirements:
25% of the underlying stock value, minus the out-of-the-money amount, plus the premium
15% of the strike price, plus the premium
Now, let's say my $100 worth of securities plummet to $15. Let's also say the underlying of my Put Option also plummets to $0. Under these circumstances, I would not be required by Fidelity to do anything because my $15 worth of securities is still equal or higher than $0 (25% of the underlying stock at $0) and $15 (15% of the strike price of $100).
This Option is then inevitably exercised, leaving me on the hook for $75 owed to Fidelity ($100 strike - $15 worth of liquidated securities) and absolutely no collateral left for Fidelity to enforce this debt.
So, how did these margin requirement rules really protect Fidelity at all? I am clearly misinterpreting them. Can someone explain where I'm wrong?