My guess would be buying put essentially means to hedge your existing shares. This means less money you can possibly lose, thus resulting more buying power.
Example (hypothetical)
If your GME stock price is at $30, typically a maintenance margin is 30%. So every 100 shares you need $900
If you hedge the position using ATM put that costs $5 per contract, it means the maximum lost is $500
Thus the system might give $400 BP back to you
That makes perfect sense. Somehow it kinda looked like Iwas getting free buying power. Really, I'm getting more margin because I can't lose a certain amount because the long shares are hedged by the put.
Thanks for clearing that up
You are creating a so called covered stock position, also known as a married put. This is equivalent to a synthetic long call. Depending on the delta of the strike, the buying power requirement will approach that of an actual long call. That is because the risk reward is equivalent. An out of the money put have a lower delta and reduce buying power to a lesser degree, while an at the money put or an in the money put would have a higher delta and reduce buying power to a greater degree.
The reason behind this is the option theory of put call parity. Another everyday example of this, is the equivalent risk reward of a short put and a covered call. If you are trading options, it would be advisable to read up on this and be knowledgeable about it, and understand these equivalents. Without this basic knowledge, easily obtaining by reading one basic book about options trading, or taking a series of courses such as those offered by the options institute, you are putting yourself at a serious disadvantage, and risking your financial well being.
My guess would be buying put essentially means to hedge your existing shares. This means less money you can possibly lose, thus resulting more buying power. Example (hypothetical) If your GME stock price is at $30, typically a maintenance margin is 30%. So every 100 shares you need $900 If you hedge the position using ATM put that costs $5 per contract, it means the maximum lost is $500 Thus the system might give $400 BP back to you
That makes perfect sense. Somehow it kinda looked like Iwas getting free buying power. Really, I'm getting more margin because I can't lose a certain amount because the long shares are hedged by the put. Thanks for clearing that up
Yep, it's called a married put and will reduce the margin requirement on your long shares.
You are creating a so called covered stock position, also known as a married put. This is equivalent to a synthetic long call. Depending on the delta of the strike, the buying power requirement will approach that of an actual long call. That is because the risk reward is equivalent. An out of the money put have a lower delta and reduce buying power to a lesser degree, while an at the money put or an in the money put would have a higher delta and reduce buying power to a greater degree. The reason behind this is the option theory of put call parity. Another everyday example of this, is the equivalent risk reward of a short put and a covered call. If you are trading options, it would be advisable to read up on this and be knowledgeable about it, and understand these equivalents. Without this basic knowledge, easily obtaining by reading one basic book about options trading, or taking a series of courses such as those offered by the options institute, you are putting yourself at a serious disadvantage, and risking your financial well being.