Back To Optiontradingpedia.com Answers

"When Is There Margin Requirement in Options Trading?"



Question By Antonio Guzman

"When Is There Margin Requirement in Options Trading?"

When is there a margin requirement? does it matter whether it's a credit or debit spread? or what about if the long to short ratio is 1:2 so you have more shorts than longs?

Asked on 9 Sep 2009

explosive option trading mentor Star Trading System Training Course
Find Out How My Students Make Money Consistently Through Options Trading In The US Market Even During An Economic Downturn!



Answered by Mr. OppiE

Hi Antonio,

To put it very simply, whenever you have positions with risk potential greater than what you paid to put the position on, margin would be required. This is due to the broker's need to make sure that you are able to close the position when you have to.

The simplest way to understand this in options trading is when you write naked (uncovered) options. When you write an option, you are exposed to unlimited risk in exchange for limited profit. For instance, if you write a $10 strike price call option for $1.00, you gain $100 if the underlying stock ends at or below $10 upon expiration of those call options but if the stock rises above $10, say to $20, the holder of the option can exercise the option to buy those stocks from you for that same $10. You would then have to buy the stocks from the market for $20 and then sell it to the holder of the options at $10, incurring a total loss of $1000. In this case, the broker would make sure you have a significant amount of cash in your account BEFORE allowing you to write those call options so that in the case of an exercise, as outlined in the example above, you have the cash to buy the stocks from the market. This cash is known as the margin. Options margin is very different from margin in stocks as you can read from our Options Margin tutorial.



Similarly, when you write naked put options, you will be under the obligation of buying the stocks from the holder of those put options at the strike price anytime the options are exercised. Your broker would hence require you to have that cash in your account before allowing you to perform that options strategy. This cash is options Margin.

Yes, margin is pretty straight forward to understand in the case of naked options positions. However, margin becomes complex to calculate or understand when options strategies are involved. In options trading, both long and short options can be put together to form complex positions with complex net effects that justifies different amounts of margin. In fact, different brokers may have very different ways of calculating margin requirement for complex options trading strategies such as the Butterfly Spread. In general, all credit spreads require margin as all of them have higher risk potential than what you paid for (which is $0). However, debit spreads are a bit more complex. Some debit spreads requires margin and some don't. Some requires a negligible amount of margin when traded with one options trading broker but the same strategy may require an extremely high margin when traded with some other brokers. In general, as long as the risk potential of the debit spread is higher than what you paid to put the position on, you can be sure there is margin involved.

In the case of your 1:2 ratio spread mentioned in the question, only one short leg is covered while the other short leg remains open even if the overall position is a debit spread, as such, margin will be required.




In conclusion, the principle behind options margin is that of making sure the writer is capable of closing the position without default in order to low the risk faced by the broker itself. Different brokers have different practises especially when it comes to complex options trading strategies. There is a set of guidelines regarding options margin issued by the CBOE but not all brokers follow those guidelines. It is best to study the margin requirement schedule of the options trading broker that you currently use for more precise answers.

High Yield Covered Calls High Yield Covered Calls Make Explosive Profits From Covered Calls!
Perfect for all Options Traders! Original eBook by Optiontradingpedia.com!
This eBook Covers:
:: The Secret to looking for the PERFECT stock for Covered Calls
:: The number of ways to write Covered Calls
:: The two ways of measuring Covered Call returns
:: Most Importantly, how to automatically look for high yield Covered Call opportunities to make up to 25% a month!
This $29.90 eBook teaches you all these and more!

Average Reader Rating : 4.5 / 5
Optiontradingpedia.com is a Masters 'O' Equity company and uses Masters 'O' Equity payment gateway



Response by Antonio Guzman ...


Reply by Mr. OppiE...



Response by Others...




Add Your Response Here




Continue your journey of discovery...
Click Me For Content Index
Click Above For Content Index

Have a Suggestion?

Credit and Debit Spreads
Options Margin
Stock Options
Options Trading
Options Trading EBooks



Back To Answers Main | Go To Option Trader's HQ

 

Important Disclaimer: Options involve risk and are not suitable for all investors. Data and information is provided for informational purposes only, and is not intended for trading purposes. Neither optiontradingpedia.com, mastersoequity.com nor any of its data or content providers shall be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon. Data is deemed accurate but is not warranted or guaranteed. optiontradinpedia.com and mastersoequity.com are not a registered broker-dealer and does not endorse or recommend the services of any brokerage company. The brokerage company you select is solely responsible for its services to you. By accessing, viewing, or using this site in any way, you agree to be bound by the above conditions and disclaimers found on this site.

Copyright Warning: All contents and information presented here in optiontradingpedia.com are property of Optiontradingpedia.com and are not to be copied, redistributed or downloaded in any ways unless in accordance with our quoting policy. We have a comprehensive system to detect plagiarism and will take legal action against any individuals, websites or companies involved. We Take Our Copyright VERY Seriously!

Site Authored by