The Options Spread in a Margin Account
A customer holds a long 100-share position in JKL at $60 ($6,000) in a margin account with a $2,000 debit. The customer wants to write 1 uncovered JKL call (100 shares, strike $65) for $3 premium, and separately buy 1 JKL put (strike $55) for $2 premium. The rep is unsure whether the call is covered, whether the put is permissible in a margin account, and how the premiums affect SMA and buying power. The account has no other positions.
1. Is the call covered, and what margin treatment applies?
Read the worked answer
The call is covered because the customer owns 100 JKL shares, matching the 100-share deliverable. A covered call requires no additional margin beyond the shares themselves; the shares are already margined. The $300 premium received is credited to the account and, because the position is covered, the premium is available as SMA (subject to firm policy and the fact that the call may be exercised). If the call were uncovered, the requirement would be the greater of the premium plus 20% of the underlying value minus out-of-the-money amount, or premium plus 10% of underlying value, with a minimum of premium plus $2.50 per share. Here coverage avoids that. The rep should confirm the shares are not already pledged or committed to another short call.
2. What is the margin treatment of the long put, and how do the two premiums affect SMA?
Read the worked answer
A long put is not marginable as collateral in the same way stock is; the premium is paid in full and the option has no loan value. The $200 premium is a debit to the account, reducing SMA or requiring cash. The $300 call premium is a credit. Net effect on SMA: +$300 − $200 = +$100, assuming the account otherwise has SMA available. However, the long put is a protective hedge only if it covers the same shares; here the put is a separate position and does not offset the call. The account's equity is $6,000 − $2,000 + $300 − $200 = $4,100. Required maintenance on the stock is 25% × $6,000 = $1,500, so equity of $4,100 is sufficient. The rep should document that the put premium was paid in cash and not margined.