1

If a covered call has same risk profile as naked put, how come brokers allow covered call but only allow naked puts to experienced traders?

2

It is because of how margin is calculated. There are inefficiencies in that margin structure, especially when it comes to options because you can basically draw your own risk graph and profile with a set of options contracts and underlying assets.

A covered call does not require any margin really, to initiate the position.

A naked put does require margin because you are borrowing.

Similarly, Portfolio Margin rules are a distinct set of margin rules reserved for wealthier clients. They also have completely different risk profiles for the exact same kinds of strategies. This is just to illustrate how the rules and industry practices can fall outside of logic in circumstances where a client can create synthetic and equivalent risk profiles as other clients.

  • When writing a put, why do I need margin? I only need margin if I am assigned, not when I am writing a put,correct? – Victor123 Nov 14 '14 at 1:22
  • 1
    @Victor123 No, you need margin for if the stock price goes down while you are holding the put. In a covered call, you have secured this by having already bought the stock, so your actual position is already worth potentially tens of thousands of dollars. In a naked put you have only sold a $3 at the money put using like $300 dollars of capital, so you have to put up more for the price fluctuations of the underlying asset. If the price of the underlying asset decreases your put could EASILY be worth 10x more, putting you on the hook way more than your total account value,all to earn a mere $300 – CQM Nov 14 '14 at 15:40

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