Margin for stock options traders

Margin for stock options traders

Like the options market itself, trading on margin in options is quite different, and often more complicated and risky than equities.
For "defined-risk" options strategies—like long puts and calls or verticals—margin requirements are relatively straightforward. Margin functions like a cash account inside a "margin" account, meaning an investor simply needs to put the cash up for the cost of long trades. Or, in the case of short strategies, such as short vertical spreads3 or iron condors4, investors need to put up the amount at risk.
Short vertical spreads, for example, would require the difference between the strike prices less the net premium received. Remember, if or when investors utilize such strategies, they need to follow the margin rules on the stock or underlying.
For option traders with accounts approved for advanced options strategies who are willing to step further out on the tightrope, it's possible to sell calls or puts "naked," meaning with no hedging position in place to offset any losses. Margin requirements will vary from broker to broker, usually from 15% to 20% of the underlying value. Keep in mind, however, selling naked options can potentially expose traders to large or unlimited risks.

Margin for the long-term investor seeking short-term financing

Much like other traditional loans, margin requires the posting of collateral to backstop the money that's being borrowed. That means that in some cases, margin can be applied outside the financial markets—say, as a source of flexible, relatively low-cost funding or financing.
However, there are unique risks if margin is used for such purposes, as well potential tax implications. Schwab does not provide tax advice. Clients should consult a professional tax advisor for their tax advice needs. For example, interest expense would typically only be tax deductible if the proceeds of the debt are used to purchase investments, and those investments generate taxable net investment income. Another risk when using margin as financing is the collateral—the securities in an account—could depreciate and trigger a margin call. At that point, the account holder would be required to deposit funds to meet the margin call. In essence, a margin loan could be called in at any time.