Kirk Du Plessis 3 Comments. If you plan to sell options as part of your overall trading strategy, you need to understand how margin requirements work. I base my trade strategies in option selling. But each of these strategies allows us to collect option premiums up front and put up margin for the trade. Much of the time, you are paying for time decay which is slowly eating away at your profits each day.
As a result, the stock moves and yet the option expires with little or no value at expiration. Just like trading commissions, brokers can have very different margin requirements. When you open your account with a broker, you should request options trading authorization. Some brokers will classify options trading clearance within different levels ranging from one to four.
Below is a quick sample margin schedule from our broker thinkorswim. Margin schedules are great to help you quickly calculate and determine if you are going to have enough buying power for a particular position or strategy. For those of you who are math wizards, you are going to love this stuff. Everyone else, you are just going to have to take us at our word on these calculations. The value of the above equation must be greater than: If either of these two calculations yield a higher margin amount, then the highest value is used.
If you have enough cash or stock holdings within your account to cover the margin requirements, then a trade will not trigger the activation of the margin borrowing capacity that is available to you. There are some strategies you can take to reduce your margin and we have created a short video looking at a couple of ways we can reduce our margin requirements on trades. We look at some simple ways that you can reduce or cut your margin requirements and also increase your return.
These give us the biggest PNL, dollar-wise, at the end of the year, but, of course, they tie up a lot of capital margin. In the video, we talk about reducing those market exposures on selected strategies. This helps not only reduce overall risk in the portfolio, but also increases return on capital which can dramatically help with our overall profit, and use of funds. We also have a second video which shows you how to free up more margin and cash to help you continue trading regularly.
If you have any other questions about understanding margin requirements for options trading, please feel free to add the into the comment box below, and we will answer them for you. Kirk founded Option Alpha in early and currently serves as the Head Trader.
Kirk currently lives in Pennsylvania USA with his beautiful wife and two daughters. Any cautions in using a PM account? Thanks glad you like it all — the only thing I would be aware of are the adjustments they can make back to standard margin should you ever hit a margin call.
Each broker is going to look at it different but some will take you back down to regular even if you have a margin call once and satisfy it. Understanding Margin Requirements Just like trading commissions, brokers can have very different margin requirements. Broker Clearance Levels For Options Trading When you open your account with a broker, you should request options trading authorization.
Sample Broker Margin Schedule Below is a quick sample margin schedule from our broker thinkorswim. Ways To Reduce Your Margin There are some strategies you can take to reduce your margin and we have created a short video looking at a couple of ways we can reduce our margin requirements on trades. Long-term selling options even holding the margin is by far the superior strategy. Free Video Training Courses. Daily Options Trading Alerts.More...