Friday, May 9, 2014

Options and margin outline


Options and margin

·        Can NOT buy option on margin if expires < 9 mo

·        Pay 100% of options premium-on margin, off margin

·        LEAPs, options >9mo, deposit 75% of option cost

·        LEAPs, loan value=25%

Selling options

·        Write covered calls

·        If covered, no margin

·        Naked, uncovered options-there is initial margin requirement

·        Margin call, a % of market value

Suppose an investor buys 10 70 calls for a premium of 8. How much must the investor deposit?

·        8x100x10=8000

Marking to the market

·        Securities valued at day’s closing price

·        Broker/dealers use it to make sure customer’s have enough equity in margin account

·        Minimum maintenance level, broker/dealer tells customer to deposit more $ or stock

·        Stock loan, broker/dealers borrow stock from other broker/dealers-have to keep some $ to pay for borrowed stock

·        Marking to market, all margin accounts, in long and short accounts, anytime there are borrowed securities

Under which of the following circumstances will the broker/dealer firm mark to the market for the customer’s account?

·        When the market changes and more margin is required

·        When market value changes

·        Customer must deposit more $

Margin account

·        $2000 minimum requirement

·        If purchase price under $2000, customer must deposit all of price

·        If purchase $2000-$3,999 deposit $2000 minimum

·        If $4,000, deposit $2000

Government bond

·        No Reg T requirement

·        Minimum maintenance requirement 5% of principal

Municipal bonds

·        Maintenance requirement:15% of par value or 25% of market value-pick lower one

Same day substitution

·        Can buy one stock, sell a stock same day and use sale proceeds to pay for purchase

·        Sell more than buy, keep all proceeds. If restricted-follow retention requirement-keep 50% of excess sales price

New issues

·        Can NOT buy on margin

Loan value

·        Amount of $ a broker/dealer can loan on a fully paid for margin-allowed security

·        To buy stock, deposit equity-money or stock

Buying power

·        Amount of securities a customer can buy

Buying power=Money or (SMA)/ Reg T

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