The Complete Guide to Option Strategies: Advanced and Basic Strategies on Stocks, ETFs, Indexes, and Stock Indexes

CHAPTER 30

Margin

In the stock world, margin typically means a loan from a broker to a customer to purchase stock. But margin has a different meaning when it comes to option trading. In the options world, margin does not refer to a loan from a broker to a customer but instead is a calculation threshold that determines the amount of assets that must be held on deposit to originate and maintain a short option position. Margin on a stock is typically concerned with a long position; but, in contrast, margin on an option is concerned with a short option position. This chapter describes margin on stocks, ETFs, indexes, and stock index futures and addresses margin planning.

OVERVIEW

A margin requirement for options is the amount of cash (or other assets) an option seller is required to have on deposit to cover a position as collateral. It is the amount of money that must be deposited by an option writer to ensure performance of the writer’s obligations under an option contract. Initial margin is the amount of margin required when a position is opened. Maintenance margin is the amount that must be maintained on deposit after a position is opened. Maintenance margin is set at a level below the initial margin requirement. The Federal Reserve Board and exchanges where an option trades establish minimum margin requirements for short options, but brokers can impose higher margin requirements.

After a short option position is established, every change in the value of the underlying instrument ...