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in that post what does this mean >I use some leverage to overcome the lower premium revenue. he uses the premium from the OTM short puts to borrow?
by throwlaplace 7y ago
in that post what does this mean
>I use some leverage to overcome the lower premium revenue.
he uses the premium from the OTM short puts to borrow?
- kccqzy 7y agoIt means he doesn't have the entire notional amount of an option to cover the short put. For example, if you want to sell an SPX put at $3000 strike, then the notional value of that trade is $300k. He doesn't have $300k in the account for that one trade though. If you want a leverage factor of 2x, then for $300k in the account you'd trade two such options, each having a margin equity of $150k. Since you're trading two options, the profit and loss are both enlarged by 2x. The worst case scenario is that if SPX drops by 50% and he doesn't take any action before that, he'd have no money left. The author mentioned that he uses a leverage of 2x to 3x. That means you need $100k to $150k in the account to trade a single contract. Hardly for beginners.