When you sell an options position, you will usually incur margin. This will be avoided with some debit spreads, such as a Bull Call or a Bear Put, but otherwise you will probably have to stump up.
Calculating the maximum margin for standard Bear Calls and Bull Puts is easy. The maximum margin will be the distance between the strike prices, multiplied by the number of contracts and the options per contact, multiplied by a 120% margin premium
For example, let’s say you do a Bear Call on CBA with:
Sell 50 contracts of a $74.01 – 21st February expiry Call
Buy 50 contracts of a $76.01 – 21st February expiry Call
The maximum margin on this position will be $12,000
What happens if you do a Bull Put AND a Bear Call? (Such as an Iron Condor)
If you do a Bull Put and a Bear Call for the same expiry date, the margin will amount to the side of the trade with the greatest margin, as long as the strikes of the Bear Call are above the strikes of the Bull Put.
Let’s say you do the above Bear Call, with a February Bull put with:
Sell 50 contracts of a $71.01 – 21st February expiry Put
Buy 50 contracts of a $70.01 – 21st February expiry Put
The margin on the Bull Put will be $6,000, so the maximum margin would be $12,000 – the maximum margin on the Bear Call side of the trade.
However, if the strikes of your Bear Call are below the strikes of your Bull Put (such as a Credit Strangle), the maximum margin charged will be the maximum margin on the Bear Call plus the maximum margin on the Bull Put.
For example, let’s say you do a Credit Strangle on CBA with:
Sell 50 contracts of a $79.01 – 21st February expiry Put
Buy 50 contracts of a $77.01 – 21st February expiry Put
Buy 50 contracts of a $72.01 – 21st February expiry Call
Sell 50 contracts of a $70.01 – 21st February expiry Call
My trade is not incurring maximum margin, what causes the margin to change on a day-to-day basis?
If the trade experiences an adverse share price movement, the margin on the position will increase.
As your trade approaches expiry, the margin incurred on the position will usually increase.
If the volatility on the position or the underlying stock increases, the margin incurred on the position will usually increase.
Unless a position is already at maximum margin, it is A LOT easier for margin on a margin incurring position to increase than it is to decrease.
For this reason, we require traders to prepare for maximum margin on their positions rather than accounting for the day to day margin movements. This will ensure your account is not overdrawn.
Margin can seem complicated, but once you understand the calculations it is relatively simple. If you have an questions, or you need assistance calculating margin, please contact us at advisers@traderscircle.com.au or 03 8080 5788.