Question

A United States investor writes five naked call option contracts. The option price is $3.50, the strike price is $60.00, and the stock price is $57.00. What is the initial margin requirement?

Answer 1

Answer:

The initial margin is $5,950

Explanation:

To calculate for the initial margin, we have to decide from two options. After making the calculations, the initial margin would be the one with a greater outcome.

Given:

Option price = $3.50

Strike price = $60

Stock price = $57

Stock price - Strike price = $60- $57 = $3

Option 1:

$500 * [(3.5 + 0.2)*(57-3)$

$= 5,950$

Option 2:

$500 * (3.5 + 0.1 * 57)$

$= 4,600$

Since we got $5,950 in our first calculation, we will take that as our initial margin as it is greater than the second option. It can be provided in part with initial sum of $500 * 3 = $1,750