Overview of Margin Requirements for Options

Note: Margin requirements referred to herein mean margin requirements set-forth in Cboe Rule 10.3 and are minimums that brokerage firms must require in customer accounts.Brokerage firms can impose higher requirements. FINRA 4210 also sets-forth comparable margin requirements for options.

Strategy-based margin rules have been applied to option customers' positions for more than four decades. (Please note that, as an alternative to the strategy-based margin methodology, a portfolio margining methodology may be applied to certain customer accounts.)

In the stock market, "margin" refers to buying stock on credit. A margin customer pays for half (50%) of the cost of buying stock (the margin) and the brokerage firm lends the customer the balance. Margin customers are required to keep securities on deposit with their brokerage firms as collateral for their borrowings. Buyers of options can now buy equity options and equity index options on margin, provided the option has more than nine (9) months until expiration. The initial(maintenance) margin requirement is 75% of the cost(market value) of a listed, long term equity or equity index put or call option. One who takes a "long" position in a non-marginable (less than nine (9) months until expiration) put option or call option is required to pay the premium amount in full.

In the options market, "margin" also means the cash or securities required to be deposited by an option writer with his brokerage firm as collateral for the writer's obligation on a short option (i.e., to buy or sell the underlying interest, or in the case of cash-settled options to pay the cash settlement amount), if assigned an exercise. Minimum margin requirements currently are imposed by the options markets and other self-regulatory organizations, and higher margin requirements may be imposed either generally or for certain positions by the various brokerage firms.

Uncovered writers may have to meet calls for substantial additional margin in the event of adverse market movements. Even if a writer has enough equity in his account to avoid a margin call, increased margin requirements on his option positions will make that equity unavailable for other purposes.

If a holder of a physical delivery call option exercises and wishes to purchase the underlying interest on credit, the holder may be required to deposit margin with the holder's brokerage firm. Holders of physical delivery options on a foreign currency should be aware that, at the date of this booklet, foreign currency has no value for margin purposes except to the extent that credit has been extended on the same foreign currency.

Certain limited risk spreads, including butterfly spreads and box spreads (collectively referred to as "spreads"), may now be established and carried in a cash account if the spread is composed of European style, cash settled index options that all expire at the same time.. For basic two-legged spreads The requirement for debit (or long) spreads is to pay for the net debit in full. For credit (or short) spreads, cash or cash equivalents equal to the maximum risk (less the net credit received for selling the spread) must be deposited and held in the account.

Exchange rules also provide for lower maintenance margin requirements for the underlying instrument in certain strategies that employ a long American style option as a hedge.

Margin requirements for option writers are complex and are not the same for every type of underlying interest. Margin requirements are subject to change, and may vary from brokerage firm to brokerage firm. However, margin requirements can have an important effect on an option writer's risks and opportunities. Persons considering writing options (whether alone or as part of multiple position strategies, such as spreads or straddles) should determine the applicable margin requirements from their brokerage firms and be sure that they have sufficient liquid assets to meet those requirements in the event of adverse market movements.