Saturday, March 2, 2013

A Simple Review of Margin Requirement and Theta of the Karen-Super-Trader Strangle

There were some discussions on Karen (the Super trader)'s strategy about its ROM & Theta decay on average. To answer a reader's question, I spent a little time to analyze a regular strangle on TOS. With 47 days to expiration for April, the strange receives a credit of $5.25 as shown in the chart below. Somehow, the probability of expiration ITM shown in the chart is shown close to 20% on the upside. It contradicts the probability indicated at the trade page on TOS.
The Theta is about 70. I think it's close to the average $80 range as another commentator indicated, considering are many more days for Theta decay. I tried to analyze Theta decay in the analyzer but the analyzer chart showed some weird curves that I don't understand. So I have to ignore it for now.

The margin requirement for a margin paper account was real big. With the 10% probability ITM call and 5% probability ITM put strangle, the margin was a little over $24K I believe. So for a $100K margin account, we can sell 2 such SPX strangles with a margin requirement of about $50K. This is the initial capital used for opening positions. If an adjustment is made by selling another option, the margin will be around $75K, reaching the limit mentioned in the original interview. I think if SPY is used, the contract size will be that of the SPX times 10. Thus, SPY will offer more flexibility for capital usage for a $100K account.

In the IRA paper account, the margin field is illegal + 300 shares. I'm not sure what it means though.


  1. I agree with you. I tried to emulate her trading style since mines is extremely similar. However, TOS margin is so high, that I can only sell a few options myself. I'm glad I'm not the only one with questions about this.


  2. This article is lacking.. Did you even mention portfolio margin?