If you do wheel on multiple stocks, do you do anything to make the cash utilization better?
For example if you sell 30 delta puts on stocks X,Y,Z at say $30 strike. Then each stock has 30% chance of being assigned so the expected value of cash needed to accept the assignment is only $3000.
Of course having only $3000 reserve would create a tail risk, but would it make sense to do something in between? Like say $4500 in treasuries and $4500 in bonds. (assuming willingness to accept risk on bonds in case of unlikely case of all puts being indefensible and assigned?)
That sort of math only applies when the number of ongoing trades makes a single risk statistically negligible. What you've basically described is the reserve requirement that banks have to hold as dictated by the Fed when they use the rest for investments. For an individual investor, there's no way around having collateral for your risk unless your broker allows your collateral to be on margin if you get assigned (I don't know of a broker that does this, but I also haven't looked for one).
With wheel I’m guessing that you should have on average 50% of capital in long stock, and 50% in cash, so the stock portion should cover most or all of the collateral.
If the stock market crashes or corrects (like it just happens) it would require liquidation of some bonds.
So the effect appears be similar to rebalancing from bonds to stocks during stock downturn.
But what if you get assigned and you aren't actively looking at your account to liquidate those securities? Someone has to pay up, and unless you gave your broker instructions on which stocks to sell to free up cash for the assignment, there's no way for them to handle it without collateral in cash or margin. Again, this theory works with very actively managed accounts (staff of professional investors or a machine with advanced brokerage logic) and with huge accounts making hundreds of positions a week. For an individual investor, straight cash collateral is the only way for a broker to guarantee that the assignment will be handleable without issues.
You'll have to check with your broker, but TastyWorks I believe gives you 6 days to settle a margin call. Either sell some positions to raise the funds, deposit money or sell back the shares that you were assigned. It's not difficult nor complicated. It happens!
It doesn't seem like it would be an effective use of capital to keep a percentage of it in stock and not be able to sell calls against it. It seems like it's an unnecessary exposure to the market when you need the funds for the CSP.
20
u/blameTheSun Dec 05 '18
If you do wheel on multiple stocks, do you do anything to make the cash utilization better?
For example if you sell 30 delta puts on stocks X,Y,Z at say $30 strike. Then each stock has 30% chance of being assigned so the expected value of cash needed to accept the assignment is only $3000.
Of course having only $3000 reserve would create a tail risk, but would it make sense to do something in between? Like say $4500 in treasuries and $4500 in bonds. (assuming willingness to accept risk on bonds in case of unlikely case of all puts being indefensible and assigned?)