This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
Options margin is the collateral that the broker requires to hold an open option position. The margin is required for option sellers (who have an obligation to buy or sell the stock), and the margin is not required for option buyers (who have already paid the premium and cannot lose more than the premium). The margin requirement is set by the broker and the regulator, and the requirement varies by the option type, the strike, the expiry, and the underlying's volatility.
The option seller's margin requirement is the most relevant for the trader who is evaluating options leverage. The seller is taking the risk of the option being exercised, and the broker wants collateral to cover the potential loss. The margin requirement determines how much of the account is tied up in the position and how much leverage the seller can use.
Why buyers do not need margin
The option buyer has already paid the premium in full. The buyer cannot lose more than the premium, and the broker has no credit risk on the buyer. The buyer's account does not need margin, because the buyer's maximum loss is the premium, and the premium is small relative to the stock's notional.
The buyer's account is debited the premium at the time of the purchase, and the premium is the buyer's maximum financial commitment. The buyer can hold the option to expiry without adding any additional funds, regardless of how far the stock moves against the option. The buyer's only risk is the premium lost.
Why sellers need margin
The option seller has an obligation to buy or sell the stock at the strike price if the option is exercised. The seller's maximum loss is undefined (for a naked call option) or large (for a naked put option, up to the strike price times the number of shares). The broker requires margin to cover the potential loss if the seller cannot meet the obligation.
The margin requirement for a seller is higher for a short-dated option (the expiration is near, and the stock's move can be large relative to the option's value) and lower for a long-dated option (the expiration is far, and the stock's move is small relative to the option's value). The margin requirement is also higher for a volatile stock and lower for a stable stock.
The margin calculation
The margin calculation for an option seller is based on the option's current value and the option's potential loss. The standard margin formula (used in the US under Reg T and in the EU under ESMA rules) is: margin = 20% of the underlying's value minus the out-of-the-money amount plus the option's current premium.
A concrete example: a trader sells a naked put option on a €100 stock, with a €95 strike and a €2 premium (the option is out of the money by €5). The margin is 20% × €10,000 = €2,000, minus €5 × 100 = €500 (the out-of-the-money amount), plus €2 × 100 = €200 (the premium). The total margin is €1,700.
The margin is adjusted daily based on the stock's price and the option's value. If the stock falls, the margin increases. If the stock rises, the margin decreases. The seller's account must have enough equity to cover the margin at all times, and a margin call is issued if the equity falls below the maintenance margin.
The portfolio margin alternative
Some brokers offer portfolio margin (PM) for professional and high-volume traders. The PM model calculates the margin based on the risk of the entire portfolio, not on the risk of each individual position. The PM margin is lower than the standard margin for a well-hedged portfolio, and the PM margin is higher for a concentrated portfolio.
The PM model is most useful for a trader who holds a diversified option portfolio (long and short options, covered and naked positions, hedged with the underlying stock). The PM model is less useful for a trader who holds a single naked option position, because the PM margin is similar to the standard margin for a concentrated position.
The margin for different option strategies
A covered call (owning the stock and selling a call option) has a lower margin requirement than a naked call (selling the call option without owning the stock). The covered call is a hedged position (the stock covers the call's obligation), and the margin is the same as the stock's margin or the stock's full value.
A protective put (owning the stock and buying a put option) has a margin requirement equal to the stock's margin or the stock's full value. The put is a hedge, and the margin reflects the buyer's position in the stock, not the put's value.
A spread (buying and selling options on the same stock with different strikes or expiries) has a margin requirement that is lower than the naked option's margin, because the spread is a hedged position. The spread's maximum loss is defined, and the broker uses the defined loss as the margin requirement.
Related resources
Where to start
If you are evaluating options margin, the most useful first step is to check the broker's margin model (standard or portfolio), the margin rates for your strategy, and the maintenance margin requirement. Our broker comparison lists the options brokers and the margin rates, which together tell you what the margin looks like before you sell your first option.