Another margin call!

It is getting annoying the margin maintenance rules of eTrade: I have an investment system for AMD, that believe it or not, every time I make lots of money, I get a margin call!

It has to do with the margin rules. In eTrade, as many other brokerages, the shares you own may be used as collateral for the margin loan, that is, the guarantee you give of being able to pay your margin balance are the shares themselves. Nevertheless, options can not be used as collateral, then, if for some reason you gain lots of money on options while you lose comparatively less on shares, you may lose "margin equity" and get a "margin call". This has happened to me so often that I lost track of the number of times.

My investment system is not very easy to describe, so be prepared to read this several times: I write short term at-the-money covered calls, meaning that I sell calls of strike prices close to the current stock price to expire in a few weeks backed up by shares, but in reality, I use the covered calls as a hedge and money flow to pay for the real investment, quantities of very long term and far-out-of-the-money puts. Since I gain either way with the shares moving up or down (or even more when they move sideways, yeah, I am like the casino: "The House Always Win") I go full tilt with margin purchases, and when I say "full tilt" I mean that I really buy everything I can buy on margin [ note: there are a number of adjustments that I do that may imply acquiring calls or other complicated plays against the market or bullish the market, but the bottom line are the written covered calls with shares overprotected ].

Anyway, when AMD crashes, as it happened recently, those puts really appreciate, much more than what I lose on the shares (the gains on the written calls are not significant in this case); but since the puts do not count towards margin equity, I get a margin call, and typically it forces me to sell a chunk of long term puts, which pisses me off 'cos I have to make sure that the order gets executed the margin call day and so I get hit with the bid/ask spread that may be huge in highly volatile environments...

Fortunately, this time I really wanted to reduce my AMD positions because half the downward movement I expected to happen in 2007 already happened, so, the next half is not so clear: I am not so sure that AMD will go below $7 now that it is @$10, not with the same conviction I had when it was at $13.50 that it will go below $10. I could, in principle, "neutralize" the position to not speculate on whether AMD will appreciate or not with the intention to just "milk" the written calls at over 1% per month of total gains including margin interest and all; but I think I can give my money better use. All in all, I sold 1/4 of my AMD positions and I am now 1/2 as bearish as I was before.