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What Is Margin in Options Trading: A Guide

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Written by Timothy Sykes
Updated 4/21/2023 7 min read

Margin in options trading refers to the cash or assets needed by brokers as collateral. You need to submit this margin as collateral if you want to write or sell options.

Options margin is especially important for more complex options strategies. But that doesn’t mean beginners can’t benefit from learning about it. Remember, it never hurts to build your knowledge account.

Let’s dive in!

What Is Margin in Options Trading?

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Margin in options trading is the collateral you need to write or sell options. This collateral can be in the form of cash or underlying securities for the options you write.

The Financial Industry Regulatory Authority (FINRA) sets minimum options margin requirements. Options exchanges may also set their own rules.

Brokers might have extra margin requirements on top of the ones that the regulators and exchanges set.

Not all options writing needs a margin. Strategies like covered puts and calls don’t have required margins. They don’t need margins because you have to own the underlying stock before using the strategy.

Beginner options traders don’t need to be concerned with margins yet. Most brokerage services start beginner traders at Level 1 trading clearance. Level 1 traders only have access to the most basic of options strategies that don’t require margins. When they reach Level 2 and beyond, they might need to have a margin trading account to use certain strategies.

There’s no two ways about it: options margins can get complicated. Complex options strategies like strangles and straddles need you to calculate multiple margins.

Margin requirements will also impact your trading plan. You might lose more if a trade doesn’t go your way, just as your profits may have a more rapid trajectory.

Learning options trading lingo is one of the first steps to becoming a smart trader. Check out my guides on swing trading, strike prices, and spread option trading.

Options Trading vs Margin Trading

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Options trading and margin trading are two very different things.

Options trading requires margin loans for some strategies. Margin trading refers to trading stocks with money loaned from the brokerage.

Options trading and margin trading have similarities and differences. Let’s go over their similarities first:

  • Both trading methods can provide a higher rate of returns than regular trading.
  • Their loss potential can also be greater.
  • Both trading methods need extra approval from your brokerage.

What are the differences between options trading and margin trading?

  • Margin trades require a margin loan from your brokerage. Options trading doesn’t need you to take a loan.
  • Margin trades increase your asset buying power directly. Options trading increases your buying power indirectly. It’s indirect because options give you the ability to trade a stock at a more desirable price.

How to Avoid Option Margin Requirements

You can avoid options margin requirements by choosing options strategies that don’t rely on margin. Some beginner strategies, like long puts and long calls, don’t have margin requirements.

You can also work around margin requirements on these strategies:

  • Covered puts and calls: Covered puts and calls require you to own the underlying stock. That means you don’t need to submit the shares as margin.
  • Debit spreads: In a debit spread, you buy and sell options of the same class (i.e., either calls or puts) for the same asset. The option you buy is more valuable than the one you sell in this strategy, offsetting the obligation of the option you sell with the right to exercise the option you buy. The end result is that you don’t need a margin at all.

The more experienced you are, the more options strategies you’ll have access to. Read my article on option trading levels to learn more.

How to Calculate Margin for Option Trading

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Margin amounts differ for each trading strategy. Different brokerage firms also require different margins. This means it’s hard to pin down an exact formula to calculate the margin for all kinds of options trades.

The Chicago Board of Options Exchange (CBOE), however, does a pretty damn good job. They provide a calculator for margin requirements. You can also check their Margin Manual to learn more about the initial margin requirements for various trades.

I’ve said before that margin requirements can be broker-specific. Some brokerage firms provide margin calculators to help you determine margin costs.

These calculators are tuned to each broker’s requirements. That’s why they’re likely the best way to calculate margin.

Different brokers offer different benefits for traders. Check out my guide to the best brokerage firms for options trading.

Key Takeaways

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Options margin is cash or assets you need to deposit before selling options. How much margin you need to deposit depends on the option type and regulator decisions. Some exchanges also require an extra deposit on top of what’s mandated by regulatory bodies.

Beginner traders don’t need to worry about option margins. They’re rarely found in basic options strategies.

As traders learn and level up their trading approval, they’ll start encountering margin requirements. Most traders encounter options margin requirements when they reach Level 2 trading clearance.

If you don’t want to trade with margin — wise choice — you can work around it with some strategies. Covered trades and debit spreads don’t require any margin deposits.

You can profit from options trades with or without a margin. The key is designing a strategy that fits your unique goals and temperament.

Having a good mentor helps. In the options world, I think there’s no better mentor than my former student Mark Croock.

Mark has racked up $4 million in career earnings, mostly from trading options. He’s done this by adapting my penny stock trading strategies to options. Before he was a teacher, he was one of my best students — watching every single webinar in the Trading Challenge 2 or 3 times!

Now he’s got his own mentorship program, called the Evolved Trader. Check it out for strategy sessions, trade alerts, a great chat room, and more!

Did that clear up your questions on options margin? Let me know about your experiences in the comments!

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”