Understand The Fundamentals Of Margin requirements

When you open a brokerage account with your broker, your broker may need you to deposit cash and/or securities as a form of collateral to finance your trades. This deposit placed is termed as the margin requirement. Hence, margin also refers to the amount of collateral a trader places with the brokerage firm.

The margin that is required on every trade is calculated by brokers, exchanges and regulators and is meant to serve as protection against default.

From an option seller’s perspective, the margin in his account enables him to fulfill his obligation to buy or sell shares if assignment occurs. The margin in his account also allows a trader to make a cash settlement when and if he is assigned. In addition to that, traders may be allowed to borrow against the securities in the account.

Generally speaking, the margin requirement would be greater for option sellers than option buyers. The margin requirement is also dependent on the options trading strategy used (vertical spreads, naked calls, etc) , the number of option contracts purchased and sold, expiry month of the option traded, the strike price and the price of the option.

Different brokers have different margin requirements. There isn’t a one size fits all margin requirement. If in doubt, do seek the advice of your broker. Be prepared to meet these margin requirements if your trades turn against you. 

For more on how to calculate your margin requirement, visit:

http://www.cboe.com/tradtool/mcalc/