CFA Practice Question
Which of the following positions would require the use of margin?
II. Short calls
III. Short puts
IV. Long puts
I. Long calls
II. Short calls
III. Short puts
IV. Long puts
A. I and IV
B. II and III
C. II and IV
Explanation: The shorting of options always requires the use of a margin. This is due to the fact that short option positions will always place the writer in an obligatory position (i.e., a position in which the writer is required to either purchase or sell the underlying asset should the contract be assigned). In a covered call situation, where a call option is sold on stock held long, the underlying stock serves as the margin.
User Contributed Comments 2
| User | Comment |
|---|---|
| rabihCH | And I thought I finally managed to understand this convoluted terminology! |
| GBolt93 | Except that a long call isn't always a covered call. Isn't it just because you can't lose more than the purchase price on a long call/put, therefore there's no need for margin? i.e. you purchase a call for $5 and stock goes to $0, you owe nothing, just lost the purchase price of $5. |