Writing naked options is usually subject to initial margin requirements. The initial margin that is required by the CBOE for a written call option is the greater of two values:
- A total of 100% of the option’s premium plus 20% of the underlying price less the amount by which the option is out of the money, if any.
- A total of 100% of the option’s premium plus 10% of the underlying price irrespective of its moneyness.
In equation form, that can represented as:
(1) Initial margin = (number of options × contract volume) × (premium+ 20% × current underlying price – OTM amount)
(2) Initial margin = (number of options × contract volume) × (premium+ 10% × current underlying price)
Consider an investor who writes five naked call option contracts on a share of stock. The option price is $4, the stock price is currently trading at $52, and the exercise (strike) price is $55. The initial margin for this put is the greater of two calculations:
1 – Since the option is $3 out of the money:
Initial margin = (5 × 100) × (4+ 20% × 52 – 3) = $5,700
2- Since the option’s moneyness is irrelevant, so:
Initial margin = (5 × 100) × (4+ 10% × 52) = $4,600
Therefore, the initial margin requirement is max (5,700, 4,600) = $5,700
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