Market house of cards based on debt

[mostlylong]

@MarkR

2. Over the 3 weeks, at 3.7%, you will earn $89 in interest on the $42,000 that you’ve retained in your account.

This reminds me of two earlier discussions on how collateral for an option trade represents an accounting cash flow in an IRR calculation.

@mostlylong

@MarkR

This could be done, but it doesn’t really represent reality because those cash flows never happen. The money accounting for the liability (let’s say number of options times strike price) remains in the account throughout, and earns interest at the usual rate.

This is a very real liability that is a very real part of the economics of the trade. Because that liability is real, your broker will require you to post very real collateral. You can be sure that the broker is accounting for this liability.

@MarkR

@mostlylong

This collateral that supports the short put is a cash flow.

How exactly is it a cash flow? Where does it flow to and where does it flow from? When I look at my brokerage account, I see no cash whatsoever moving anywhere, it remains exactly where it was previously. And it earns exactly the same amount of interest as it did previously.