I’ve had Sarepta on my watch list for a few months now. On Friday I liked the way the charts looked and I liked the premium, 1.4%. Not bad for a 1 week trade! I really don’t like the pharmaceutical sector much but I said let me grab this 1 week trade with a nice premium and hopefully it goes well. I sold 20 contracts of the $36 3/10/17 Naked Calls for a 50¢ premium ($1000). At the time the stock was at $34.40. When the trade got executed I noticed my margin buying power went way down. I did a little investigation a I found out that the margin requirement on this stock was 100%. Margin accounts have so many rules, some from the government and some from your broker. I’m not even going to try to explain the ramifications of getting involved in a stock with this margin requirement because I don’t completely understand it myself. You’ll have to call your broker to see how it works in your account. But it’s not good! All weekend I couldn’t wait until Monday to see what Sarepta was going to do. I was just hoping for any opportunity to get out of this trade. Lucky for me, this morning the stock opened down and at 2:15pm I was executed on a “Buy to Close.” I put in a price in at 25¢ but I wasn’t executed. I was hoping to keep half the premium for the 1 trading day trade. When the order wasn’t getting grabbed I changed it to 30¢ and I was executed. I just wanted out. I’m glad I am! Here’s the “Sell to Open” and the “Buy to Close” orders:
Sell to Open 20 SRPT 3/10/17 $36 C @ 50¢ (+$1000)
Buy to Close 20 SRPT 3/10/17 $36 C @ 30¢ (-$600)
Profit +$400
I cannot believe I didn’t notice the margin requirement of 100%. The reason is because I did a Naked Call; I didn’t buy the stock. When you buy the stock the margin requirement comes up on your screen, and it doesn’t when selling options. Not only doesn’t the 100% requirement affect your margin but the broker puts that requirement because they don’t like the stock. They don’t trust that the stock isn’t going to go hey-wire and the investor isn’t ready to make adjustments. The only reason I caught it was, I noticed a big drop in my buying power. I’m glad I did and I’m glad I’m out with a nice 1 day $400 gain. Serapta is off my watch list!
Today the Coach learned something. Make sure you check the margin requirement before you make the trade.
If I made my normal 50 contract trade on this stock with this margin requirement, I would have gotten a margin call.
I hope this all makes sense, if not send me an email.
Steve
The Options Coach