State the dollar amount of margin you are required to keep with a broker when selling two call options on Your Beloved Machine with strike price $105 when the current stock price of YBM is $104,the call price is $4,and each call is on 100 shares.The rule for margin (borrowing)requirement for option writing as set by the Federal Reserve Bank is as follows: for writers of call options on equity and "narrow-based index," the margin account initial requirement is 100 percent of option proceeds plus 20 percent of underlying security/index value less out-of-the-money amount,if any,to a minimum of option proceeds plus 10 percent of underlying security/index value for calls.

Question

Quizplus · Accepted Answer

The option writer is selling two call options on YBM with a strike price of $105 when the current stock price is $104. Since the options are out-of-the-money, the out-of-the-money amount is zero.
The option proceeds are calculated as $4 x 100 x 2 = $800.
The underlying security value is 100 x $104 = $10,400.

According to the margin requirement rule, the initial margin requirement is:
100% x $800 + 20% x ($10,400 - $0) = $880 + $2,080 = $2,960

However, the minimum requirement is option proceeds plus 10% of underlying security value for calls, which is:
$800 + 10% x $10,400 = $800 + $1,040 = $1,840

Since the initial requirement is higher, the margin requirement is $2,960 for the writer of the call options. As the writer is selling two call options, the total margin requirement is $2,960 x 2 = $5,920. However, since the writer already received $800 as option proceeds, the actual amount of margin required to be kept with the broker is $5,920 - $800 = $4,760. Therefore, the correct answer is D.

State the Dollar Amount of Margin You Are Required to Keep