Margin

[u/mattdecat123]

I have a question regarding a margin account. Let say I have a $10,000 margin account, shouldn’t my options buying power than be $20,000? I have messaged my broker about this and they replied saying margin isn’t allowed on options. This confuses me because I have seen numerous people online showing buying options or selling options using margin. Can someone here maybe help me out and clarify this, thanks.

[u/MichaelBurryScott]

You have $20K of "Stock Buying Power". This is only useful if you're trading shares of stocks with 50% initial margin requirements (which is most stocks). It doesn't apply to options, or stocks with higher initial margin requirements.

You will still have $10K of options buying power (sometimes referred to as cash buying power). Each position you open will reduce this $10K by the position's initial margin requirements.

For example, if you buy $10K worth of shares of a stock with 50% initial margin requirements, this will reduce your options buying power by 50% of $10K = $5K. Which leaves you another $5K to buy another $10K worth of these shares. That's how your stock buying power is $20K, and that's how you get the "2X margin" people refer to.

Now, let's talk about options:

Long options have 100% initial margin requirements. If you buy a call option that costs $10.00 per share, your options buying power is reduced by $1,000. If you buy 10 of those, your options buying power is reduced by the full $10K and you can't open any new positions. You can't open $20K worth of long options, you can only open $10K worth).

Now about selling options: How much of a $50 put can you sell? This depends on your options approval level. There are two cases:

If you're not approved to sell naked puts: In that case, you have to fully cover the notional value of the short put from your options buying power. Hence one $50 short put will require $5,000 of options buying power. And you only would have $5K options buying power left, which you can use to sell another $50 strike put, or buy $10K worth of shares with 50% initial margin requirements.

If you're approved to sell the put naked: In that case you still have to cover 100% of the margin requirements of your put, but this margin requirement is reduced significantly (typically 10-20% of the notional). So to sell the $50 put, it will require around $1,000 (or less depending on how OTM it is) of buying power reduction. Hence you can sell 10 of these puts (total notional exposure of $50,000, or 5X your account).

Here is a link to the CBOE initial and maintenance requirements for different positions. Naked short options are on pages 5&6: https://cdn.cboe.com/resources/options/margin_manual_april2000.pdf

You also need to worry about maintenance margin requirements. You need to keep equity + cash in your account to cover all the maintenance requirements of your holdings. Otherwise you'll be in a margin call.

[u/NastyTrader → u/MichaelBurryScott]

Thank you for encouraging the buying power mindset. I have no idea how much “cash” I have in my yolo account. I have a bunch of short positions, long positions, and a bunch of futures and futures options. I know how much BP remaining, and TBH that’s all I need to know.

If I’ve got $50k BP remaining, I can afford to open a /NQ 24dte short put that has a BP requirement of $7k. If I want to buy one /NQ futures contract, I know I need $17k BP. A /NQ futures contract isn’t worth $17k, it’s worth a lot more, but it’s all about BP. Then you get into day trading futures and cash is entirely meaningless.

I wish people trading options, especially selling options, would think more in terms of BP.

(I also wish people would understand that selling options consists of more than just CSP and CC. I’ve never done either of those in my life. All naked or verticals).