Sunday, January 17, 2010

Margin Requirements for options (IB Reg T account)

I had a discussion with Randomjaywalking about the margin requirement for U.S. options in general.

He uses thinkorswim and I use both Interactivebrokers (IB) and tradestation.  We were discussing how much margin is being held in our accounts when we trade options.  I have been using a margin account (IB Reg T account) in Interactivebrokers but I never knew how much margin is actually held.  It seems like the actual mount of margin being held in my IB Reg T account is a lot lesser than what he described.

It turns out that the actual margin held depends on the types of option you trade and the formula is quite complex for IB.  I just picked the naked short put as an example:

Initial margin = 100% * option market value + (20% * underlying market value - out of the money amount or 10% * underlying market value, whichever is greater) or $2.50 * multiplier * number of contracts, whichever is greater.

20% above is 15% for broad based index options. Short sale proceeds are applied to cash. Not allowed for IRA accounts.

So if GS is trading at $165 and you sell one contract of ATM option at $3, the initial margin held will be  $3 + $3,300 = $6,300 and the subsequent margin will be another $6,300

The naked short put will have the same margin requirement as the the naked short call.  A covered call or a vertical spread will have their individual margin requirements.

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