Is there any Margin Payable in the Options? Well, if you have this question – you are not alone. A lot of traders, even experienced ones, go through this confusion! Let’s figure out the concept here.
In the options trading, margin refers to the cash or other assets which is required to deposit in the brokerage account of the option writer as collateral security for their obligation of buying and selling.
Brokerage firm uses that security in case the writer of the option is not able to meet their obligation or they have insufficient balance.
The meaning of ‘margin’ is different in different fields. In finance, the margin is a popular term but, with popularity, it is confusing as well. This is simply because of the meaning of margin in finance charges in the different context of finance.
For instance, if we talk about the margin in the stock market, then here also the margin is not the same for stock trading, futures trading, and options trading.
Whereas, the term ‘profit margin’ is different. That is, even within the stock market, the margin has different implications within different trading segments.
Margin payable in options is the cash or other assets, which is required to be paid by the option writer to their brokerage firm. The margin is paid as collateral security for the obligation they have for buying and selling of an underlying security to the buyer of the option.
Margin payable in options is not the same for the writer of an option for all the underlying securities.
Margin payable in options differs from one security to another. Though there are guidelines for the margin level which is fixed for every broker. But, they add some additional charges to that.
And that’s why the margin level differs for the option from one brokerage firm to another and therefore funds required by the option writers to write the contract also differ.
In options trading, the margin level is fixed. Unlike, future trading the margin level is a variable and depends on the performance of the market or fluctuates according to the market.
There are five trading levels on the basis of risk of transaction types in options trading according to the options brokers. There is no need for margin in level 1 and 2. But, because of probability to lose more money than your investment in an options trade, it requires the margin to be deposited in level 3, 4 and 5.
All those investors/traders who want to trade in different types of options need to open a margin account to their brokerage firm.
But, before opening a margin account, you are required to give information about your assets and income. Also, your credit rating will be checked. So, that broker can know your credit score.
It helps the brokers to take a safe side in case of any unexpected loss from options writer. You will be asked to sign an agreement in which assets in your account will be used as collateral security against loans.
But, just opening a margin account doesn’t allow you to trade in options.
A broker may interfere if you have less experience in riskier options trading strategies. First, you must gain experience in the less risky option trading strategies then move forward.
Margin payable in options gets deposited by the option writer in the margin account to the brokerage firm.
Is it possible to write options without margin?
Yes, it is possible to write options contracts without depositing margin.
There are different methods by which one can trade in options contracts without margin. But, there must be some alternative protection which can compensate losses that might incur.
For example, suppose you have a call option to write and you have decided to own that underlying asset. Then there will be no requirement of any margin.
A debit spread is also a method to trade options without margin. When you write an option in a debit spread, you buy in the money option and then by writing a cheaper out of the money option to recover some of the costs incurred.
For instance, if you buy a call option with the strike price of ₹50 and then write the call option of the same company with the same contract size with a higher strike price say ₹60. Then your loss is limited and there is no requirement of any margin.
Margin payable in options: For the buyer/writer or both?
The option buyer pays a premium to buy the option (call or put option) and has limited risk up to the premium paid. As their risk is limited to the premium, so they don’t need to deposit margin money.
While the option writer sells the options without holding any long position. The option writer has a high probability of earning profit compared to the option buyer.
They receive a premium from the buyer of options and obliged to keep the agreement when the buyer exercises their right. Because of an option writer’s unlimited risk, they are required to deposit margin money to the brokerage firm.
Margin payable in options: Summary
Here is a quick summary of this topic on margin so that you get complete clarity about the concept:
Cash or other securities which are required to deposit with brokerage firms by options writers are known as options margin.
Before trading in options, you need to open a margin account to your brokerage firm.
Only option writers need to deposit margin.
It is possible to write options without margin if there is alternative protection to work again losses that might incur.
Due to unlimited risk in option writing, options writers need to deposit margin.
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