BAJAJ BROKING
February 20, 2025
3 mins read
An option margin is the cash or securities traders need to keep as collateral in their account when they want to sell options in options trading. The margin acts as a safety net that helps cover a trader’s potential losses.
It is important to remember that margin requirements will always depend on the type of option you’re trading. This is why investors must understand the concept of options margin before writing options. Here, we will take a look at everything you need to understand about these provisions.
When compared to stock or futures margins, option margin requirements might come off as a little more complicated. The main purpose of margin in stocks and futures is to boost the buying power of investors. However, in options trading, the margin is mainly used as collateral that helps an investor secure a position.
Though there are particular minimum margin requirements in place, brokers are allowed to add to the rules. This ends up causing variations in the overall requirements from one broker to another. As already discussed, the margin requirement will also vary depending on the option being used. For a covered call or covered put, for example, there’s no extra margin requirement as the underlying stock acts as collateral.
The very step to trading in options is to open a new brokerage account with a request in place to indulge in options trading. Brokers are used to categorise traders into different levels depending on how experienced they are and the strategies they use. Level I traders are authorized to buy options as no margin is required for it. However, if traders are looking to sell naked puts, they would need to be categorized as Level II. Levels III & IV are for traders who have advanced strategies with lower margin requirements.
It is important to understand margin requirements as they have a direct impact on the profitability of trade since they are responsible for tying up capital. This is why it is important to check the margin requirements before placing a trade order so that traders can make sure that they can be met if the market moves against them.
The good thing about options positions is that not all of them require margin which means that traders can use certain strategies without tying extra capital up. For example, long options, whether puts or calls, do not require margin. Here are some of the strategies that traders can use to avoid margin requirements:
Covered Calls & Covered Puts
Under this strategy, if traders own the underlying stock, they can sell a call option or put option without margin. Let us suppose that a trader owns 500 shares of ABC. they can write or sell five ABC call option contracts with no margin requirements because the shares end up acting as the collateral.
Additional Read : Call Option vs. Put Option
Debit Spreads
In debit spreads, traders buy an in-the-money option and sell an out-of-the-money option. Here, since the long option offsets the risk of the short option, no margin is required. This spread helps control the risk and helps avoid the use of any extra capital.
Before using options margin, certain considerations need to be taken into account and risks, acknowledged.
Trading with options margin can prove to be tricky if all the aspects of the trade are not considered. This is why it is important to understand how options trading works to ensure that options margin can be avoided where possible.
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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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Margin in options selling can be reduced in two ways.
Through covered calls and covered puts when the trader owns the underlying stock.
Thorough debit spreads where traders buy an in-the-money option and sell an out-of-the-money option. Here, since the long option offsets the risk of the short option, no margin is required.
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