I decided that I want to start selling option contracts so I figured that I better know what I can and cannot do within my various accounts.
MARGIN ACCOUNT:
I can do pretty much anything although the complexity of some of the strategies somewhat restricts my activities only due to the platform being not as options strategy friendly as it could be. I might review the Elite platform and see how it fairs compared to the Pro package.
Level 1
I can buy options with a $1000 account startup and can continue to do so as long as the net worth of the account remains above $250.
Level 2
I can sell covered calls as long as the account balance is $2500. For this I have to already hold the underlying stock so it is a bit of a cash creation strategy only based on a core position. The difference between 2 and 3 are slight but are delineated for the purpose of taxation and registered accounts.
Level 3
Spreads and straddles are allowed, although I can trade a straddle without being "authorized" as it is really just two long trades. I think that perhaps the trades are somehow tied together when done as an official "straddle" as it specifies the simultaneous call and put at the same strike price.
The Spread is buying one option and selling another against it. Buy the 20 strike call and sell the 15 strike put for example. The call is a long position that is the same as holding the stock so that if the put is exercised and you are forced to buy the stock, my call is also exercised to cover this as I buy the stock at the call strike price. In that case the premium I made selling the put goes against the loss off being put the stock and executing the option at the higher strike, creating a loss. The spread is a limited risk scenario without holding stocks as even if the stock hit zero my total loss is fixed.
Level 4
$25,000 minimum account size.
Uncovered writing. Basically I can sell calls and puts without any safety net as I may have them exercised at whatever the going prices are. This is a very risky trade plan and not something I would even consider unless I wanted to sell puts and I didn't care if I ended up owning the stock. Selling naked calls is just plain dumb, in my opinion, as if a call gets exercised I don't end up with anything other than a an uncontrolled loss.
Now, in a registered account, RRSP or TFSA, I know I cannot short stocks so I would expect that level 4 is not an option, uncovered writing. Level 3 might not be because the option trades are setup as a money making venture as opposed to a position protection measure. This I was not certain of but I have confirmed it.
Registered accounts can only trade level 1 or 2.
OK, this puts me at a disadvantage in my plans going forward. I would like to be able to trade a variety of strategies that are not allowed in a tax sheltered account so I will have to accommodate the eventual taxation of a portion of my trading activities.
Jeff.
Questrade, My direct access discount broker.
Subscribe to:
Post Comments (Atom)
Interesting post. Thanks for the info.
ReplyDeleteIt's too bad margin trading accounts are not eligible for RRSP because I was thinking of writing short-term, out-of-the-money calls on broadbased US indicies but I guess that's not allowed...
...and when I mean out-of-the-money, I mean WAY out-of-the-money, almost to the point where the possibility of the underlying index rising to the exercise price is close to zero.
ReplyDeleteYou don't have to go way out, in fact too far and you have very little to work with. Selling naked options needs capital so you could use SPY and sell a Nov 111 call for 31 cents (or 112 for 17 cents). To cover that and get to use less capital you could also buy a protective call higher at 114 for 5 cents creating a 26 cent credit (or 12 cent credit) in two weeks. Execute 100 contracts and you have a $2600 gain (or $1200 gain) for just letting it expire. Maximum loss is $3000 (or $2000) should SPY jump over $114 though.
ReplyDeleteThe odds are in your favour so taking a higher loss potential is worth it as long as you monitor the position and exit before you reach that loss point...say if SPY hit $112.
Keep in mind that $107 to $111 is a 3.7% ($112 is 4.7%) is is likely to do that in this wishy washy period in two weeks? Your call.
You could do a similar put spread for a 6 cent credit ($600) or do both. That way you can close one spread if the price gets close and let the other one expire. If they both expire then the take home is, conservatively, $1800.
I cannot recall the margin requirements but the call spread would likely only need $3000 cash to cover the whole trade...maybe a bit more depending upon the broker margin reqs.
Go to December and raise the levels to 116/119 for the exact same return.
WAY OTM is only $117 for SPY, Nov 117 are 1 cent. The commissions will cost more than you could possible make at any size trade.
Well, so far I've been trading VIX options (primarily calls, not puts, given the fact that I'm bullish on the market and calls are overvalued vs. their intrinsic values) profitably. Yes, they certainly require a lot of margin but they are still great speculative investments as the VIX generally trades in a narrow band.
ReplyDeleteAnd that's why I find it a shame that I can't employ these investments in my RRSP, nor my TFSA.