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Question about margin when selling options
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Question about margin when selling options

  #1 (permalink)
Trading Apprentice
Vancouver, Canada
 
Futures Experience: Intermediate
Platform: TradeStation, Questrade
Favorite Futures: Options
 
Posts: 5 since Jun 2014
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Question about margin when selling options

Hi everybody, I've got a question about margin maintenance as related to option trading. So I've been trading options for a few years now and I love it. But over all that time, there's just one thing I still don't understand!

I mostly sell puts, and everytime I make a trade, it uses up some margin maintenance (I believe on ThinkOrSwim it's called "Buying Power Effect". On Questrade, it's called "Maintenance Excess"). However, some stocks (of comparable stock price & contracts) use up WAY MORE margin than others! Does anybody know how this is calculated?

For example, some stocks like VIPS or VRTX use a relatively small amount of margin when I sell puts on them. However, other stocks (like blue chips or low-beta stocks) use a LOT more margin -- even when the stocks have comparable stock prices. And yes I'm trying to compare similar strikes & similar contracts.

Obviously, it's in my best interest to find stocks that use up LESS buying power/margin maintenance, because then I can sell more puts. Any guidance here would be greatly appreciated, thanks!

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  #2 (permalink)
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  #3 (permalink)
Trading for Fun
Brisbane, Queensland, Australia
 
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Excession, Have you looked to see if there is a relationship between margin require and premium received? Option prices are influenced by volatility aren't they? So you would imagine so is margin and premium. They vary. Maybe the better thing to consider is the return on investment. In other words what is the percentage of premium you are receiving based on the margin required. You could then compare trade candidates? Cheers, BlueRoo.

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  #4 (permalink)
Trading Apprentice
Vancouver, Canada
 
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Yeah after digging into it a bit more, there is definitely a relationship there. Here's what I think is happening in more detail:

- for a more volatile, high-beta stock, you're right the premiums are definitely higher even for strikes that are further OTM

- because those premiums are higher, I can sell puts further OTM

- the margin requirement calculation at many brokers DO take that into account (which I didn't realize)... in other words, the further your strike is OTM, the lower the margin requirement will be


Previously, I had thought that the only factor in calculating margin requirement for naked puts were the total exercise value of the underlying stock. But now I know better.

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  #5 (permalink)
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Excession View Post
Yeah after digging into it a bit more, there is definitely a relationship there. Here's what I think is happening in more detail:

- for a more volatile, high-beta stock, you're right the premiums are definitely higher even for strikes that are further OTM

- because those premiums are higher, I can sell puts further OTM

- the margin requirement calculation at many brokers DO take that into account (which I didn't realize)... in other words, the further your strike is OTM, the lower the margin requirement will be


Previously, I had thought that the only factor in calculating margin requirement for naked puts were the total exercise value of the underlying stock. But now I know better.

Have you asked your broker?

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  #6 (permalink)
Trading Apprentice
Vancouver, Canada
 
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tturner86 View Post
Have you asked your broker?

Not yet, but they do have a page on their site explaining the calculations. I'm changing brokers soon so I just wanted to know what general factors are involved in determining margin requirements when selling naked puts.

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  #7 (permalink)
1.Fibs 2.??? 3.Profit
Puerto Rico
 
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Have you seen the CBOE Margin Manual:

CBOE Margin Calculator

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Question about margin when selling options-margin.pdf  
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  #8 (permalink)
Trading Apprentice
Vancouver, Canada
 
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rmejia View Post
Have you seen the CBOE Margin Manual:
Link removed

This is pretty darn cool! Thanks!

I'll use this to compare to what my broker's charging me starting tomorrow.

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  #9 (permalink)
Hyde Park,
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Excession View Post
This is pretty darn cool! Thanks!

I'll use this to compare to what my broker's charging me starting tomorrow.

Just wanna mention two more things.

1.) Not all brokerages tie up the same amount of margin. Not sure if it applies in this setting, but when I would try to set up a 4-legged position like a double calendar, it would be much cheaper on ThinkOrSwim/TD Ameritrade than it would be on my alternative brokerage, OptionHouse. I don't know what QuestTrade is like, but since they likely to focus as strongly on Option Trading as OptionHouse, their margin might be higher

2.)
Quoting 
Obviously, it's in my best interest to find stocks that use up LESS buying power/margin maintenance, because then I can sell more puts

I understand your reasoning behind this, but I think you are just increasing the likelihood of really getting burned in the markets. Instead of focusing on how much money you can make by selling puts, I would also factor in how much money you could lose by selling puts as well. Also, I think the deciding factors on an option trade should be based on something that puts probability (instead merely the amount of profit) in your favor, such as where key support is, how much you can afford to lose, are you ok with owning the stock, what type of volume has been on the buy side vs the sell side recently, etc.

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