Option Margin
Candlefocus EditorGenerally, option margins are much lower than other forms of margin trading, and therefore, can give traders access to a great deal of leverage. For example, if a trader decides to sell a 50-delta put option, which is a tactic used to pick up long-term premiums, this would come with just one-fifth the margin requirement of other investments.
The amount of the margin is determined by the stock’s price, the strike price, the price of the option, the option’s delta, the option’s expiration, the stock’s volatility, the trader’s account size, and the trader’s other open positions. The higher the stock price, combined with a higher delta, would require a larger margin requirement.
Each broker has different requirements and can vary greatly, so it’s important to understand each broker’s individual margin requirements. Most brokers will require the full cash value of the option as a margin, but there are also options that require only a fraction of this amount. Some brokers will also assess “buying power” against the option margin, which is the amount of money the trader can use for carrying out options trades.
It’s important to remember that, while option margin can provide a great deal of leverage, it also carries high risk and potential losses that should be thoroughly researched and weighed before entering an option trade. Knowing your broker’s option margin requirements and understanding the risk involved is essential when trading options.