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Options Made Easy: Your Guide to Profitable Trading, Second Edition by Guy Cohen

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Margin

Margin is defined as the amount of liquid funds required on deposit to maintain the viability of the trade. A margin account is effectively the mechanism by which you can borrow funds from your broker account but you are required to cover your potential risk liability with liquid funds in your account. This is particularly relevant to those traders who sell short, sell naked, or trade net credit spreads.

When you buy shares, you either pay in cash or use a margin account (effectively borrowing funds from your brokerage) for around 50% of the share purchase price. The maintenance margin is set to ensure that the balance in the margin account never becomes negative. This has in the past been set at around 25% of the value of the shares, ...

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