Hi WinOption, Dave and KY,

It was a very good online Q&A session. For the excellent contents there, $0.20 for each of you.

We also shortlist KY's comment for the June's 'Posting of the Month' for its short, precise and accurate posting.

Anyone to share?

Etradehome.com

Hi Winoption,

OTM options writing requires lower margin requirement. That means you can sell more contracts with the same amount of money. Here is the example:

Take SPY as example. SPY is at $135 now.

Selling 130 call (ITM) ties your margin up by $3400.
Selling 140 call (OTM) ties your margin up by $2200.

But if you look closer, the difference is not that big. Only if you sell much further out of the money, such as 150 call, the margin will drop to $1200. At 150 call, the premium is only $0.10. Not worth doing at all.

I personally prefer ITM call and put selling because the margin requirement is not as high as we thought. I have the tendency to sell more contracts when it comes to OTM options writing. ITM options writing is my No.1 strategies, I use OTM options selling occasionally whenever a stock gaps too much in the opening minutes.

I also agree with KY, the rollover and repair in ITM options writing gives you a nice feeling. I bought back the options at a profit, only to lose temporarily on delta.

Thank you!

Hanz

I think it is a misconception that a lot of people think that the margin is higher for ITM and OTM options. In general because of the put call parity and the way SPAN margin work (I am referring to futures options and not stocks options) the ITM and OTM margin is almosts similar.


It is also not true that selling OTM will allow you to sell more contract.

OTM has no intrinsic value thus the margin is low and premium is low
ITM has intrinsic value thus the margin is high and premium is high too

when you sell a ITM options even thou margin is high but remember you collect a lot of intrinsic value and this is added back to your trading capital.

If you work it out the margin is almost similiar

Good point there Dave. More intrinsic value in options selling will add on to the 'equity with loan'. I forget about this point.