Here you go:
MARGIN REQUIREMENTS:
Important Definition: 1 contract = rights to 100 shares. All the following examples are based on 1 contract.
BUYING OPTIONS
Debit spreads, or, âlong spreadsâ are the simplest to calculate. The capital required is simply the net cash flow, as follows:
Long Spread Example
Suppose you buy the XYZ April 50 call for $4 and sell the XYZ April 55 call for $3 for a total net debit of $1 a share, which is your requirement. If you purchase 1 contract (100 shares worth), and sell 1 contract (100 shares worth), you are required to pay $1 x 100 = $100.
SELLING OPTION SPREADS
Selling credit spreads requires that the maximum possible loss based on the strike difference be deposited with your broker. The premium received from selling a spread may be used toward meeting this requirement. The maintenance on credit spreads is the same as the initial requirement. Note that the option you buy must not expire sooner than the option you sell. Otherwise, the position is uncovered.
Short Spread Example
Suppose you sell the XYZ May 65 call and buy the XYZ May 75 call for a total net credit of $4.5. The spread has a strike difference of 10 and is for 1 contract (100 shares), so your requirement is $1,000. You may use the credit received of $450 toward this requirement and thus must deposit an additional $550 into your account.
SELLING UNCOVERED OPTIONS
While margin requirements are subject to change depending on market conditions, the basic formula for margin on uncovered options always involves the same three variables: the proceeds from the sale, a percentage of the underlying stock (which is subject to a minimum) and the out-of-the-money amount (if the option is out-of-the-money). In this case, it is easier to give a few examples:
Example #1
You sell 1 XYZ May 65 call @ 4, with XYZ currently trading @ 60. At this time, the margin requirement equals the proceeds received from the trade plus the greater of:
⢠20% of underlying stock less the out-of-the-money amount, or;
⢠10% of stock price, or;
⢠First scenario: $4 (proceeds) + $12 (20% of underlying) - $5 (out-of-money amount) = $11. On 1 contract, you multiply $11 x 100 for a margin requirement of $1100.
⢠Second scenario: $4 (proceeds) + $6 (10% of underlying) = $10 x 100 = $1000
Conclusion: Your margin would be based on the first scenario because it generated the greatest of the two, and equals $1,100.
Example #2
You sell 1 XYZ May 50 put @ 3, with XYZ currently trading @ 60. Again, the margin requirement equals the proceeds received from the trade plus the greater of:
⢠20% of underlying stock less the out-of-the-money amount, or;
⢠10% of stock price, or;
⢠$3 (proceeds) + $12 (20% of underlying) - $10 (out-of-money amount) = $5 x 100 = $500
⢠Second scenario: $3 (proceeds) + $6 (10% of underlying) = $9 x 100 = $900
Conclusion: In this case, your margin would be based on the second scenario and would equal $900.
SELLING UNCOVERED OPTIONS, BOTH CALL & PUT AT ONCE (âSTRANGLEâ), ON THE SAME STOCK.
Requirements = same as the CLOSER TO THE MONEY uncovered call or put alone, plus the premium of the other option. Thus, if you are short the call and the put above:
The call in Example #1 is only $5 OTM, while the put in Example #2 is $10 OTM. Thus, we take the entire requirement on the call, and only the premium on the put, as follows:
⢠As stated above, the requirement for the call is $11.
⢠As stated above, the PREMIUM only for the put is $3.
⢠Requirement = $11 + $3 = $14.
Note that strangles do not require the options to be in the same month, or that either be earlier than the other.
