Question about margin when selling options

J

Jospe

Hi everybody, I've got a question about margin maintenance as related to options. So I've been trading options for a few years now and I love it. But over all that time, there's just one thing I still don't understand!

I mostly sell puts, and everytime I make a trade, it uses up some margin maintenance (I believe on ThinkOrSwim it's called "Buying Power Effect". On Questrade it's called "Maintenance Excess"). However, some stocks (of comparable stock price & contracts) use up WAY MORE margin than others! Does anybody know how this is calculated (or why this is)?

For example, some stocks like VIPS or VRTX use a relatively small amount of margin when I sell puts on them. However, other stocks (like blue chips or low-beta stocks) use a LOT more margin -- even when the stocks have comparable stock prices. And yes I'm trying to compare similar strikes & similar contracts.

Obviously, it's in my best interest to find stocks that use up LESS buying power/margin maintenance, because then I can sell more puts. It seems to have something to do with implied volatility (i.e. the more volatile the stock, the less impact on my maintenance excess), but I'm not sure how it works.

Any guidance here would be greatly appreciated, thanks!
 
Jospe said:
Hi everybody, I've got a question about margin maintenance as related to options. So I've been trading options for a few years now and I love it. But over all that time, there's just one thing I still don't understand!

I mostly sell puts, and everytime I make a trade, it uses up some margin maintenance (I believe on ThinkOrSwim it's called "Buying Power Effect". On Questrade it's called "Maintenance Excess"). However, some stocks (of comparable stock price & contracts) use up WAY MORE margin than others! Does anybody know how this is calculated (or why this is)?

For example, some stocks like VIPS or VRTX use a relatively small amount of margin when I sell puts on them. However, other stocks (like blue chips or low-beta stocks) use a LOT more margin -- even when the stocks have comparable stock prices. And yes I'm trying to compare similar strikes & similar contracts.

Obviously, it's in my best interest to find stocks that use up LESS buying power/margin maintenance, because then I can sell more puts. It seems to have something to do with implied volatility (i.e. the more volatile the stock, the less impact on my maintenance excess), but I'm not sure how it works.

Any guidance here would be greatly appreciated, thanks!
More...

Is this in a PM account or Reg-T?

Generally you get worse margin on a low ivol stock in PM because the standard is -20%, and the prob of it happening is very low so you will lose a lot more money on a low vol stock.

Case in point a stock with ivol of 8 vs 200. In the 200 vol scenario a 15% move is expected and is covered by the theta (very little margin required). In an 8 vol scenario it represents a 30 stdev event which will effectively turn your put into long stock.
 
I'm in Canada, so this is a Reg-T account (we're not allowed to have PM accounts).

But yes that makes sense. So it is related to IV then.... thanks!
 
Jospe said:
I'm in Canada, so this is a Reg-T account (we're not allowed to have PM accounts).

But yes that makes sense. So it is related to IV then.... thanks!
More...

No. If it's Reg-T it has to do with something else. I'm not sure. Reg-T is rules based (20% of the ITM amount - OTM amount) or something similar.

If it's PM, it has to do with vol levels.
 
I *think* I know what's going on. For the stocks I mentioned (and others similarly), I was selling puts that were far OTM - mainly because premiums were still high for far-OTM strikes. And premiums were still high because these are typically much more volatile, "risky" stocks.

I think the fact that my put strikes were so far OTM made the margin requirement much lower than selling puts closer to the money (even on stocks with the same underlying price).

I know this seems obvious to the experts here, but I thought only the exercise value of the stock that I'm short (via puts) was used to calculate the margin requirement... not how far OTM my strikes were.
 
Jospe said:
I *think* I know what's going on. For the stocks I mentioned (and others similarly), I was selling puts that were far OTM - mainly because premiums were still high for far-OTM strikes. And premiums were still high because these are typically much more volatile, "risky" stocks.

I think the fact that my put strikes were so far OTM made the margin requirement much lower than selling puts closer to the money (even on stocks with the same underlying price).

I know this seems obvious to the experts here, but I thought only the exercise value of the stock that I'm short (via puts) was used to calculate the margin requirement... not how far OTM my strikes were.
More...

Yeah. That would be it. If your options are further OTM, that helps reduce your margin requirement.

The formula is something like max(20%*StrikePrice - OTM amount,MIN_VALUE) + Premium
 
Jospe said:
Hi everybody, I've got a question about margin maintenance as related to options. So I've been trading options for a few years now and I love it. But over all that time, there's just one thing I still don't understand!

I mostly sell puts, and everytime I make a trade, it uses up some margin maintenance (I believe on ThinkOrSwim it's called "Buying Power Effect". On Questrade it's called "Maintenance Excess"). However, some stocks (of comparable stock price & contracts) use up WAY MORE margin than others! Does anybody know how this is calculated (or why this is)?

For example, some stocks like VIPS or VRTX use a relatively small amount of margin when I sell puts on them. However, other stocks (like blue chips or low-beta stocks) use a LOT more margin -- even when the stocks have comparable stock prices. And yes I'm trying to compare similar strikes & similar contracts.

Obviously, it's in my best interest to find stocks that use up LESS buying power/margin maintenance, because then I can sell more puts. It seems to have something to do with implied volatility (i.e. the more volatile the stock, the less impact on my maintenance excess), but I'm not sure how it works.

Any guidance here would be greatly appreciated, thanks!
More...

I suspect that the different margin requirements are due to the perceived quality of the stocks and the total float within brokerage hands. Margin is to protect the broker against retail defaults since they will have to make good if you don't. They prefer trades on highly liquid items.

As a rule, I have found US options far more liquid than Canadian ones, however, EVERY TIME the option salespeople come to town, they tell me that that has been fixed now. I tell them I ran a simple 20 options purchase tests on US and Canadian sides a few years back - all of the US ones filled, and only one partial fill happened on the Canadian side. Co-incidence? I think not. Remember that Montreal is investigating organized crime involvement in construction and government as we speak. (http://www.montrealgazette.com/corruption/index.html)
 
Just a tidbit for your TOS account. On the website you can look at "Maintenance Requirement" for short puts. You have to customize the columns and add it. Voila!

(If you pay attention you'll see the number change.)

I'd be cautious though as any kind of blow up can put you in a bind if you're near full margin.
 
Whistlingleaf said:
Just a tidbit for your TOS account. On the website you can look at "Maintenance Requirement" for short puts. You have to customize the columns and add it. Voila!

(If you pay attention you'll see the number change.)

I'd be cautious though as any kind of blow up can put you in a bind if you're near full margin.
More...

Thanks, but my problem wasn't finding out what the margin requirements are. I wanted to know why certain stocks (of similar strike & underlying price) had vastly different margin requirements sometimes.

I wanted to understand what factors were used to make that calculation, and it makes it even harder when brokers sometimes calculate this differently! This makes a big difference for naked put sellers.

The CBOE margin requirement tool is super helpful though, because I can see what all the factors are before I make the trade. :cool:
 
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