Chapter 04 · Section 4.1
Case Study- Colgate Calls
Linda has $5000 in cash and 300 fully-paid Colgate stocks in her account. She forsees a quiet market and seeks a greater return by selling Colgate Nov 35 calls quoted at $4.00. Colgate stock is currently trading at $38.
If she writes 2 Colgate Nov 35 calls, her initial margin requirement will be:
a) $2320 = (20% of 3800 + 400) * 2
b) $1720 = [20% of 3800 + 400 - (38 - 35) * 100] * 2
c) $7000 = (35 * 100) * 2
d) zero
Usually the contract size of the stock options is 100 shares of the underlying stock. The premium of the option is quoted on a per share basis.
Margins are only required for the option writer if she is not fully covered.
MARGIN = 20 % of the current value of the underlying stock. PLUS 100 % of the premium. MINUS the amount the option is out-of-the-money