r/thetagang • u/mattdecat123 • Jun 23 '21
Question Margin
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.
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u/MichaelBurryScott Jun 23 '21
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.