2019issue C106-7
Stock, index, and futures options as a capital and expiration filter
Buying a stock, index, or futures option requires available cash equal to the full premium at entry. Uncovered option sales and many spreads add a posted margin balance and a higher option-approval level, and futures options generally need a separate futures account. Expiration can force automatic exercise into shares, cash settlement, or futures assignment. Editorial interpretation: lock those outcomes before entry and reject any structure the account cannot absorb.
- A long call or put on a stock, an index, or a futures contract requires available cash equal to the full premium when the order is entered.
- Uncovered option sales and many spreads need a posted margin balance and a higher option-approval level than long options, and futures options generally require a separate futures account.
- A cash-secured put must be backed by enough cash to buy 100 shares per contract at the strike, while a reduced-margin short put posts a percentage-of-value requirement that can change as the stock price moves.
- At expiration, in-the-money stock and fund options go through automatic exercise into a 100-share position, broad-index options use cash settlement, and futures options may use cash settlement or futures assignment depending on the underlying.
Lock the capital and the expiration outcome
Buying a call or put on a stock, an index, or a futures contract requires available cash equal to the full premium when the order is entered.
Editorial interpretation: treat the choice among stock, index, and futures options as a pre-trade capital and settlement filter. Lock what the account must post, name the position expiration can force, and reject any structure whose assignment or leverage the account cannot absorb.
Account type and option-approval level
Stock and index options are typically traded in a securities account with tiered option approvals, while futures options generally require a separate futures account even when one firm offers both.
Uncovered option sales and many spread structures require a posted margin balance and a higher brokerage approval level than long options alone. An uncovered option is a short option that is not offset by a matching long option or by the underlying holding, so assignment risk stays open until the short is closed or expires.
Cash-secured put and reduced-margin short put posting
A cash-secured put is a short put backed, at sale, by enough cash to buy the underlying shares at the strike if the put is exercised. For a short stock put, that backing is enough cash to buy 100 shares per contract at the strike.
A reduced-margin short put is a short stock put posted under a percentage-of-value brokerage formula rather than full cash against the strike. That posting may be 25 percent of the stock’s market value plus the option ask minus any out-of-the-money amount, multiplied by 100 per contract and by the number of contracts. The requirement can change as the stock price moves.
Automatic exercise, cash settlement, and futures assignment
At expiration, in-the-money stock and exchange-traded-fund options are subject to automatic exercise: the in-the-money contract becomes a 100-share stock or fund trade at the strike. Out-of-the-money contracts expire without a share transfer.
Cash-settled broad-index options settle in cash at expiration and do not create a share position, unlike options on the corresponding index-tracking fund. Cash settlement pays or collects cash equal to intrinsic value and does not deliver shares or a futures contract.
In-the-money futures options on many nonphysical underlyings, such as stock indexes and currencies, settle in cash. In-the-money options on most physical commodities, including many interest-rate contracts, can produce futures assignment: expiration opens a long or short futures contract at the option strike instead of paying cash.
Futures margin on an uncovered futures option
Futures margin is the performance bond required to hold a futures contract or, typically at the outset, an uncovered option on that contract. Uncovered futures-option margin is typically no larger at the outset than the margin on the futures contract itself.
In the source-period illustration, a Treasury-bond futures contract valued near 165000 dollars carried a 2640-dollar futures margin that also applied to a newly sold uncovered option on that contract.
All readings on this track · 23 readings
- 1994Selecting option expiration and strike by expected value
- 1994Evaluating DJIA weakness inside the quarterly futures cycle
- 1995Evaluating option-expiration weeks as index regimes
- 2004Index option execution through expiration and volatility context
- 2005Constructing credit spreads around settlement and implied volatility
- 2006Call credit spread execution, leftover premium and expiration decay
- 2006Expiration-aware call construction and automatic exercise
- 2007Expiration, leftover premium, and seasonal context for option construction
- 2007Seven option mistakes in premium, expiration, and implied volatility
- 2008Long straddle construction around implied volatility and expiration
- 2008Option income critiqued through volatility and expiration
- 2011Covered call writing as income holding or buy-write turnover
- 2011A five-day Treasury bond option sale as a market-regime choice
- 2011Session-access gaps, expiration exercise, and spread coverage
- 2011Weekly option tenor construction and premium drivers
- 2012PM-settled index expiration in a defensive sector regime
- 2014Weekly covered-call income and the expiration hold test
- 2016Weekday option expirations as a catalyst-timing overlay
- 2017Overlapping condors and expiration windows
- 2017Small-cap index futures listing change as a margin and options checkpoint
- 2017Pin risk as an expiration-day execution problem
- 2019Stock, index, and futures options as a capital and expiration filter
- 2020Dividend early assignment risk for short calls