Minimum Margin Requirements

Various types of equity option trades have minimum initial margin and maintenance margin requirements. There may also be separate margin requirements for index option trading. Please consult a broker or a Registered Options Principal for specific margin requirements for any type of trade not listed here. You should also keep in mind that individual brokerage firms may have different margin requirements than others on trades that involve naked option sales. The minimum margin is usually 10 percent, but most brokers require more, with 20 percent being the typical margin requirement. Following is a brief summary of margin requirements for several common options strategies (note that firms may have minimum margin requirements that exceed the amounts required for these individual trades):

Long Put or Long Call: Option premium must be paid for in full. For example, suppose you buy one XYZ December 100 call at 4 ½ ($450). You must have $450 in available cash plus the opening commission in your account to place this trade. Many brokers will require a larger minimum equity in the account before an option trade can be initiated.

Short Put or Short Call: Generally 20 percent of the underlying stock value plus any premium received and less any amount by which the option is out-of-the-money. The minimum requirement is 10 percent of the underlying stock value. For example, suppose you sell one XYZ November 90 put for a credit of 1 ½ ($150) when XYZ is at 102. The margin in this case is:

[20% x $102 + $1.50 - ($102 - $90)] x 100 shares = $9.90 x 100 = $990

The term in brackets represents 20 percent of the underlying stock price of $102, plus the credit of 1 ½ points received from the sale of the put, minus the 12 points that the 90-strike put is out-of-the-money. However, since $990 is less than 10 percent of the underlying stock value, you would be required to put up the higher amount, which in this case is $1,020 ($102 x 100 x 10%), plus commission.

Put Credit Spread or Call Credit Spread: The difference between the strike prices minus any premium received. For example, suppose you sell one XYZ December 110 put and simultaneously buy one XYZ 105 December put, for a net credit of 1 ($100). Your margin requirement for each spread contract is the difference in the strike prices (110 -105 = 5, or $500) minus any premium received (the $100 credit) for a total margin of $400 per contract.

Covered Call or Buy/Write (Long Underlying Stock and Short Call): No requirement on short call; 50 percent of long stock position less call premium received. The reason no margin is required on the short call position is that if the call holder exercises his option, you already own the stock needed to satisfy his exercise. It would simply be called out of your account. For example, if you buy 100 shares of XYZ at $115 and sell one December 125 call at 11/2, the margin requirement for the stock purchase is 50 percent of the underlying stock value ($115 per share x 100 shares = $11,500 x 50%) less call premium received ($150), or $5,600, plus commission.

Note that margins are calculated each evening after the market closes and if one or more positions have moved strongly against you, the brokerage firm may issue a "margin call," asking you to supply additional funds to maintain your position. If you are unable or unwilling to deposit the required additional funds, either a portion or all of your account will be liquidated to satisfy the call.