November 14, 2019

What Is Option Margin?

Option margin is the cash or securities an investor must deposit in his account as collateral before writing – or selling – options. Margin requirements are established by the Federal Reserve Board in Regulation T.

Option margin differs from other types of margin that you may associate with stock or futures trading.  These types of margin allow a trader to employ leverage in their trading.  Option margin is collateral needed to hold a position.

Minimum margin requirements for various types of underlying securities are established by FINRA and the options exchanges. Be advised that your broker may have very different margin requirements since they can add to the minimum requirements set by regulators. Some option strategies, such as covered calls and covered puts, have no margin requirement since the underlying stock is used as collateral.

Some options strategies that involve the selling of options but do NOT have margin requirements are:

Covered calls and covered puts.  These strategies involve owning (or owning the right to) the underlying stock, which is used as collateral in the option position. For example, if you own 300 shares of AAPL, you can sell to open three contracts of QQQ call options without any margin.

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about the author:

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

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