Put writers' margins to impact R/R Ratio on spreads and combinations

In the US, having posted very attractive set of economic numbers dollar is all set to regain its strength.

5.2pts decline last month, the University of Michigan consumer sentiment survey is expected to have rebounded this month in June supported by ongoing improvements in the labour market.

While we forecast the headline reading to firm up to 92.5 from 90.7, the inflation expectations of the survey will also be closely watched.

In addition, retail activity has amazed with 1.2% jump which was a way beyond previous print at 0.2% and forecasts at 1.0%.

While unemployment claims were quite disappointing to flash an increased 279K from previous 277K.

Import prices were a little surprised package as it printed at 1.3% from previous -0.2%.

Well any which way we reckon, the US has sufficiently produced good set of economic numbers to boost-up dollar.

In such circumstances, shorts on put options will be luring and speculators tend to jump into short puts.

But mind it, they don't come in your way without any costs.

Margins have significant impact on risk/reward profiles of each trade.

Writers of options (regardless of calls or puts as part of multiple legs strategies such as spreads, straddles or strangles) should determine the applicable margin requirements from their brokerage firms.

So, be certain if they are able to meet those requirements in case the market turns against them.

For instance, current ATM calls of EUR/USD (strikes at1.1241) (lot size 100,000) may fetch an option writer approximately about US$1000.

Writers can still prefer such option by pledging high margins if Theta benefits call shorting (i.e. Θ = high positive numbers depending upon expiry).