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Initial margin on options


What is Options Margin?

Margin in equity and index options trading is the amount of cash deposit needed in an options trading broker account when . Writing options means "Shorting" options and happens when Sell To Open orders are used on call or put options. Options margin is required as collateral to ensure the options writer's ability to fulfill the obligations under the options contracts sold.

When you write (short by using Sell To Open orders) call options, you are obligated to sell the underlying stock to the holder of those call options if the options are exercised. If you don't already have those stocks in your account, you will have to buy those stocks from the open market in order to sell to the holder of those call options. In order to ensure that you have the money to buy those stocks from the open market when the assignment happens, the options trading broker will require you to have a certain amount of money in your account as deposit and that's options margin. This is what happens in a Naked Call Write options trading strategy.

Similarly, when you write put options, you obligated under the put options contracts to buy the underlying stock from the holder of those put options if the options are exercised. That is why the options trading broker needs to make sure that you have sufficient money to buy those stocks from the holder of the put options when assigned, hence the need for options margin. This is what happens in a Naked Put Write options trading strategy.

Writers of options are also exposed to unlimited risk and limited profit, which means that the position can lose more and more money the more the underlying stock goes against your expectation. In order to close such losing positions, you would need to Buy To Close those options, that is why options trading brokers also need to make sure you have enough cash in your account to be able to do that.

This is why a lot of beginner options traders would have experienced their brokers returning an error message such as "You need at least $100, 000 in your account in order to write uncovered call/put." when attempting to write stock options.

Please note that options margin in this case do not apply to Futures Options or Options on Futures, which has a more sophisticated treatment..


How is Options Margin determined?

Options margin requirement is really the options trading broker's way of lowering the risk they face when allowing their account holders to write options. As the OCC ensures the fulfillment of all options contracts exercised, the responsibility falls on the broker should their account holder be unable to fulfill. This is why all options brokers would have their own way of determining how much options margin is needed for every scenario. The CBOE, Chicago Board of Exchange, also has a set of margin suggestions for all member firms which can be downloaded in pdf format at CBOE's Margin Manual site. However, you should understand the specific margin requirement of your options trading broker as it can be very different from what is suggested by CBOE. Some brokers have slightly more relaxed requirements while some other brokers have slightly stricter ones.

No matter how much margin is required by each broker, margin requirements for stock and index options are always fixed percentage amounts to be applied uniformly in each scenario. This is unlike the variable margin requirement for futures options or options on futures.


Exemption from Options Margin Requirements

There is one scenario which options can be written without margin requirement and that is when there is an alternative collateral in the form of owning a position in the underlying stock or a more in the money long option of the same kind than the one being sold (an options spread).

Owning a Position in the Underlying Stock

Owning a long position in the underlying stock allows you to freely write as many call options at any strike price without involving options margin. This is because the long stock position is a good collateral which can be sold to the holder of the call options at the strike price when the call options are exercised. That is why there are no margin requirements for the Covered Call options trading strategy.
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Popular Q&A

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For Ecommerce sites, what additional revenue options is there other than the headline margin? - Quora

Not sure what Amazon does per se, and we haven't quite implemented these on our cruelty-free marketplace

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Unclear about initial and minimum margin in options trading?

hi,
i m from india
can anyone tell me - the difference between mimimum and initial margin - in options trading.
also , can i sell my futures contract before the expiry date ?
i think indian traders better know the difference between america and euro stock exchanges.

yes, you can sell your futures contract before the expiration which is what you would do unless you want to take possession of the commodity.
futures or certain trades with options on futures require initial margin to put on a trade. to keep your trade you need at least minimum margin (generally less than initial margin) or the brokerage will liquidate your position without your knowledge. if you want to hold your position you would need to deposit more funds, generally a bad idea since it indicates you were wrong when you entered your position.

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