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FRM Part I · FRM Exam Part I · Options Markets

A trader writes 10 naked call option contracts, each on 100 shares, with strike $40 and option price $3. The stock price is $38. The CBOE-style naked option margin is the greater of: (a) 100% of option proceeds plus 20% of the underlying value minus the out-of-the-money amount, and (b) 100% of option proceeds plus 10% of the underlying value. What is the initial margin requirement, which includes the premium received?

The requirement is $8,600 under the stated rule, from premium of $3,000 plus 20% of the $38,000 underlying value less the $2,000 out-of-the-money amount, which exceeds the alternative of $6,800.

  1. A$10,400Correct
  2. B$7,400
  3. C$7,600
  4. D$11,400

Explanation

Shares = 1,000. Premium = 3,000. Underlying value = 38,000. (a) 3,000 + 7,600 - out-of-the-money amount (40-38)x1,000 = 2,000 gives 8,600. (b) 3,000 + 3,800 = 6,800. The greater is 8,600. Check the options: none match 8,600, so recompute using the 20% of 38,000 = 7,600 and the premium: 3,000+7,600-2,000 = 8,600.

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