"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 By Tony Guzman on 20 July 2009
Answered by Mr. OppiE
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
anytime they want to exercise their options at any
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.
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.
as long as you are writing call options while owning the same amount of shares, there should not be any margin requirement. However, if you bought the stocks on MARGIN, that is another issue altogether.