Expert: Paul Henneman - 4/15/2005

Question
Hi Paul,
I am bullish on a stock and I would like to sell naked puts.  I know the risks involved with naked put selling, so I would then immediately place a stop loss at about twice what I received, thereby reducing my risk to a max of double. (if I receive $1,000, the most I can lose if stopped out is $1,000.) The problem is margin. Brokerage firms require outragous margin ie. the full amount if I'm put the option, in this case it would be $70,000. That's crazy because the stop loss limits my risk (and the brokerages) to $1,000. Have you come across this problem before?  

Answer
Bruce,
    I apologize for the delay in replying to you! Something was up with the All experts system, I could not load the reply page for a week.
    Yes, this is standard since the bear market of 2000-2002. Things at times fell so fast (after 9/11) that even stops did not protect the brokerage firms from losing bundles of money. It is a very aggressive strategy, and most brokerages these days really demand absolutely 'perfect' protection. No way around this anymore that I am aware of. Your best bet would be to find a small brokerage firm, they can be more aggressive in their search for business.
  Also, keep in mind that there are regulations that require certain levels of margins, under federal reserve board regulations. I was not sure what these were, but looked up 'margins' in Barron's "Dictionary of Finance and Investment Terms". According to this, it is 50%. So it sounds like your Brokerage firm is very conservative and has increased this. But you will run into the problem anywhere, as per federal reserve board regulations.
  If you can't find a small brokerage, I think you are absolutely right that it is not a good use of your funds to have them locked up to that extent. I would suggest finding a more conservative approach that would enable you to have all of your funds working for you.  Instead of hitting one home run in the game, I tend to look for 30 singles or doubles. You'll end up with more in the long run every time.

Best Regards,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInstitutional.com
www.VEReports.com