When you sell options, your broker requires you to maintain a certain amount of money in your account as margin. This margin serves as collateral to ensure you can fulfill your obligations if the option is exercised. Unlike borrowing money on margin to buy stocks, options margin does not involve any interest charges.
Key Point: Options margin is collateral, not a loan. You are not borrowing money from your broker, so there are no interest charges. The money stays in your account and is simply held as a security deposit.
How Options Margin Works
When you sell (write) an option, you take on an obligation. If you sell a put, you may be obligated to buy shares. If you sell a call, you may be obligated to sell shares. Your broker needs assurance that you can meet these obligations.
The margin requirement is the amount of cash or securities you must have in your account. This money remains yours - it is not lent out or borrowed. It simply cannot be used for other purposes while the position is open.
Types of Options That Require Margin
Naked (Uncovered) Options
Selling options without owning the underlying stock or having a covering position requires the highest margin. The margin formula typically includes:
- The option premium received (credit)
- A percentage of the underlying stock value
- The amount the option is out-of-the-money (if applicable)
Covered Calls
If you own the underlying stock and sell calls against it, margin requirements are minimal because your stock covers your obligation.
Cash-Secured Puts
If you hold enough cash to buy the shares at the strike price, this is considered fully secured and does not require additional margin.
Spreads
Credit spreads (like bull put spreads or bear call spreads) have defined risk, so margin is typically limited to the maximum potential loss (spread width minus premium received).
Standard Margin Calculation
For naked options, the industry-standard formula is:
Naked Put Margin Requirement
Greater of:
- 20% of underlying price - out-of-money amount + option premium
- 10% of strike price + option premium
Example: Stock at $100, selling $95 put for $2.00
- Method 1: 20% × $100 - $5 (OTM) + $2 = $17 per share ($1,700 per contract)
- Method 2: 10% × $95 + $2 = $11.50 per share ($1,150 per contract)
Margin required: $1,700 (the higher of the two)
Margin vs Buying Power
Your buying power is reduced by the margin requirement when you open a position. As long as you maintain sufficient buying power, you will not receive a margin call. The margin requirement may change as the underlying stock price moves.
What Happens If the Position Moves Against You?
If the stock moves against your position, the margin requirement increases. If your account no longer has sufficient equity, you may receive a margin call requiring you to either close positions or add funds.
Managing Margin Requirements
Use Defined-Risk Strategies
Credit spreads and other defined-risk strategies have lower and more predictable margin requirements than naked options.
Monitor Your Positions
Keep track of how much margin your positions require and how much buying power remains. Do not use all your available margin.
Understand Your Broker's Rules
Different brokers may have slightly different margin requirements. Some require higher margins than the regulatory minimum.
Important: No Interest Charges
To be clear: options margin is fundamentally different from stock margin.
Stock Margin (Avoid)
- You borrow money from your broker
- Interest charges apply daily
- You owe money to your broker
Options Margin (Collateral)
- You set aside your own money
- No interest charges
- Money stays in your account
Options margin is simply a requirement to have a certain amount of cash or securities in your account. The money is yours and remains yours. It is held as collateral, similar to a security deposit.
Summary
Options margin requirements ensure you can fulfill obligations when selling options. Unlike stock margin which involves borrowing money and paying interest, options margin is collateral that remains your property. Different strategies have different margin requirements, with defined-risk strategies like spreads requiring less margin than naked options. Always understand your margin requirements before entering positions and maintain sufficient buying power to avoid margin calls.
Learn more: credit spreads guide and cash-secured puts explained.