Chapter 04 · Section 4.1

Excess Margin Day 2

This is the summary of what happened up to the end of day 2.


                                       Margin              Closing Prices
short 3 covered Colgate Nov 35 calls   $   0    Colgate Stock    $37.00
short 3 uncov. Colgate Nov 35 calls    $ 3,345  Colgate Nov 35 C $3.75 
excess margin:                         $ 4,055

TINA'S TRANSACTIONS ON DAY 2:Bought 5 Unisys 75 puts at 2.50

short 3 covered Colgate Nov 35 calls  $     0  Colgate Stock         $37.50    
short 3 uncov. Colgate  Nov 35 calls  $ 3,330  Unisys Stock          $75.00    
long  5 Unisys Nov 75 puts            $     0  Colgate Nov 35 Calls  $3.60     
excess margin:                        $ .....  Unisys Nov 75 Puts    $1.75

What is the excess margin at the end of the second day?

Tina bought 5 Unisys 75 puts at $2,50. All option purchases must be paid immediately in cash. Therefore her excess margin will be reduced by the amount of premium paid. Margin requirements are marked-to-the-market daily. But that is not the only reason why the excess margin changes: you must also take into account the payment and receipt of premiums. Take the total of the margin requirement and the excess margin from day 1, substract what Tina had to pay for the puts, take into account the changed margin requirement and you get the new excess margin. Tina's account is debited by $1,250 = 2.5 * 100 * 5 immediately after her purchase of Unisys puts, thus reducing her excess margin. 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