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"Is Margin Needed for Covered Call?"

Question By Tony Guzman

"Is Margin Needed for Covered Call?"

When you write covered calls against a long stock and you get called away, you have to fulfill your obligation. since you are writing calls against stock that you owned then you don't need margin to keep writing calls as long as you own such stock, right? please explain!

Asked on 20 July 2009

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Answered by Mr. OppiE

Hi Tony,

In options trading, when you sell to open call options against your long stock position, there should be no margin involved. This is because your stocks are there ready for the buyer of your call options anytime they want to exercise their options at any strike price at all.

Assuming, you own shares in AAPL and AAPL is trading at $100. Let's see what happens when you write in the money call options and out of the money call options against your AAPL shares.

Scenario 1: Writing In the money covered call
Assuming you wrote a deep in the money covered call at the $80 strike price. AAPL continued to trade at $100 upon expiration of those call options. Automatic assignment happened as the buyer exercised those call options and bought your AAPL shares for $80 per share. There is nothing to top up and hence no margin is needed.

Scenario 2: Writing out of the money covered call
Assuming you wrote an out of the money covered call at $120 strike price. AAPL continued to trade at $100 upon expiration of those call options. Since those call options were out of the money, it makes no sense for the buyer to exercise those options and you were not liable for automatic assignment. Those call options simply expired worthless. You kept your AAPL shares and can continue to write call options against them. There is nothing to top up and hence no margin is needed as well.

In conclusion, as long as you are writing call options while owning the same amount of shares, there should not be any margin requirement.

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