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Writing Option Contracts HowTo?

By Vicente   2012 Mar 13, 4:11am   1,801 views   6 comments   watch (0)   quote      

So, anyone care to expound on the writing side of option?

I've only ever done buy to open & sell to close.

I've never done a "sell to open" before. I thought I would play with some lunch money and write a put contract against some stock I hold, settled on this:

AAPL Apr Sell to Open 1 contracts of AAPL Apr 21 2012 530.0 Put
Last: 7.36, Bid: 7.30, Ask: 7.40, Bid/Ask size: 1X78
Real Time Quote Provided by OPRA @ 2:10:11 PM EDT

AmeriTrade came back with:
Your order was not accepted. Funds are not available for this transaction of a non-marginable security.

No grok. I hold the security, I have the cash, and I'm approved for options trading (although not margin).

Comments 1-6 of 6     Last »

1   gary275     2012 Mar 13, 6:54am  ↑ like (1)   ↓ dislike   quote    

You need to have margin for this. Cause you could technically sell your stock after you open the position without closing the option thereby creating a naked option with unlimited risk, theoretically. Ask your broker what level of option trading you are approved for.

2   Vicente     2012 Mar 13, 7:24am  ↑ like   ↓ dislike (1)   quote    

*doh* now I get it. Thanks!

I am only approved for the level right below margin because I specifically requested that. I've always viewed margin like playing with razor blades.

3   drtor     2012 Mar 13, 8:02am  ↑ like (1)   ↓ dislike   quote    

Another clarification here.

Usually when you have a stock you write (covered) *calls*. Meaning you sell the right for somebody else to buy your stock. There are different permission levels for buying calls vs selling covered calls vs selling uncovered (naked) calls.

If you are writing puts then the idea is that you are giving somebody else the right to sell the stock to you - so you don't need the stock itself but you need to have some money set aside, at least at lower permission levels. At higher levels you can do this naked too.

4   Vicente     2012 Mar 14, 1:41am  ↑ like   ↓ dislike (1)   quote    

Thanks friend. It's painfully obvious to me now, that I don't know enough about trading options. I'll see what study material I can find, and go back to buying and selling calls in the meanwhile.

5   Big Joe     2012 Mar 14, 3:57am  ↑ like (1)   ↓ dislike   quote    

Go check this out - gives a complete intro on how to Open to Sell option contracts. Note: you can do this on margin - but not suggested since the trading company could call for the funds at any time. Rather, it's best to only sell options when it's a company you don't mind owning if the option ends up being called.

http://www.palmbeachletter.com/

6   EBGuy     2012 Mar 14, 4:36am  ↑ like   ↓ dislike   quote    

It's painfully obvious to me now, that I don't know enough about trading options.
Please don't let that stop you. I had (and still have) a large position in a single stock that I can't part with. It was starting to reach nosebleed levels last year (a point at which I would have been okay with it being sold) so I wrote some covered calls against the underlying position and managed to partially 'finance' a new roof. The stock, of course, nosedived during the Republican mini-recession of Summer 2011. At least I have a new roof.

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