OPTIONS TIP: BUYING POWER EFFECT REDUCTION/BUDGETING WITH LONGS
When playing with a small, cash secured account, buying power effect can limit one's ability to trade since even something as basic as the 30-delta 27 short put in ROKU in the June cycle pictured here can tie up quite a bit of buying power.
The June 15th 27 short put brings in a nice 1.27/contract in credit, but comes with a cash secured price tag of the strike price (27) minus the credit received (1.27) or 25.73 ($2573)/contract in a cash secured environment. Depending on the size of your account, that simple sub-$50 underlying could be a "big" trade. For example, if you're playing with a $10k account, that one play would represent your hanging out more than 25% of total account value on one play in a single name; by most standards, that's wayyy too big a play relative to account size.
However, by taking one simple step, you can reduce the buying power effect of going naked and give up very little premium in the process: by buying the cheap June 15th 19 long, which will cost you .15 ($15) at the mid price.
Naturally, you give up $15 in credit over the naked, but you reduce the buying power effect of the setup dramatically: to $687, allowing you to use the buying power you saved to get into other plays ... .
The June 15th 27 short put brings in a nice 1.27/contract in credit, but comes with a cash secured price tag of the strike price (27) minus the credit received (1.27) or 25.73 ($2573)/contract in a cash secured environment. Depending on the size of your account, that simple sub-$50 underlying could be a "big" trade. For example, if you're playing with a $10k account, that one play would represent your hanging out more than 25% of total account value on one play in a single name; by most standards, that's wayyy too big a play relative to account size.
However, by taking one simple step, you can reduce the buying power effect of going naked and give up very little premium in the process: by buying the cheap June 15th 19 long, which will cost you .15 ($15) at the mid price.
Naturally, you give up $15 in credit over the naked, but you reduce the buying power effect of the setup dramatically: to $687, allowing you to use the buying power you saved to get into other plays ... .