Question

Regarding a customer who wishes to write a put in a cash account, __________.

A) they must have sufficient cash reserves to cover the potential purchase of the underlying asset.
B) it's typically a requirement to have a margin account for this type of trade.
C) they may need to deposit additional funds to meet margin requirements.
D) they will receive a premium for selling the put option.
E) they do not need to hold the cash equivalent of the underlying asset.

Answer 1

When writing a put option in a cash account, the customer must have sufficient cash reserves to cover the potential purchase of the underlying asset.

Step-by-step explanation:

The correct answer is A) they must have sufficient cash reserves to cover the potential purchase of the underlying asset.

When a customer wishes to write a put option in a cash account, they must have enough cash reserves to cover the potential purchase of the underlying asset if the put option is exercised. This is because writing a put option gives the buyer the right to sell the underlying asset at the strike price, and as the writer of the put option, the customer may be obligated to buy the asset.

For example, if a customer writes a put option on 100 shares of a stock with a strike price of $50, they must have at least $5,000 ($50 x 100 shares) in cash reserves to cover the potential purchase of the stock if it is exercised.