# Understanding Option Margin: Definition, Requirements, and Calculation

## What Is Option Margin?

Option margin is the collateral (cash or securities) an investor must deposit before [writing](https://www.investopedia.com/terms/w/writing-an-option.asp) or selling options to secure potential obligations. Margin requirements, set by the [Federal Reserve's](https://www.investopedia.com/terms/f/frb.asp) [Regulation T](https://www.investopedia.com/terms/r/regulationt.asp), vary by option type, and brokers may impose stricter rules. Some strategies, such as covered calls, don't require margin, offering lower-risk ways to trade options.

### Key Takeaways

*   Option margin is collateral that an investor must provide before writing or selling options.
*   Margin requirements differ for stocks and futures, serving as collateral rather than leverage.
*   Regulation T, by the Federal Reserve, sets minimum option margin requirements, but brokers can impose stricter rules.
*   Strategies like covered calls and debit spreads can help avoid margin requirements due to collateralized positions.
*   Use tools like the CBOE Margin Calculator to determine specific margin requirements for trades.

## Understanding Option Margin Fundamentals

Option margin requirements are very complex and differ quite a bit from stocks or futures margin requirements. In the case of stocks and futures, a margin is used as [leverage](https://www.investopedia.com/terms/l/leverage.asp) to increase buying power, whereas an option margin is used as [collateral](https://www.investopedia.com/terms/c/collateral.asp) to secure a position.

FINRA and the options exchanges set the minimum margin requirements for different types of securities. Brokers may have very different margin requirements since they can add to the minimum requirements set by regulators. Some option strategies, such as [covered calls](https://www.investopedia.com/terms/c/coveredcall.asp) and covered puts, have no margin requirement since the underlying stock is used as collateral.

Traders must request options [trading authorization](https://www.investopedia.com/terms/t/trading-authorization.asp) when opening a new account. Often, brokers will classify options trading clearance levels depending on the type of strategies employed. Buying options is typically a Level I clearance since it doesn't require margin, but selling [naked puts](https://www.investopedia.com/terms/n/nakedput.asp) may require Level II clearances and a margin account. Level III and IV accounts often have lower margin requirements.

Option margin requirements can have a significant impact on the profitability of a trade since it ties up capital. Complex strategies, such as [strangles](https://www.investopedia.com/terms/s/strangle.asp) and [straddles](https://www.investopedia.com/terms/s/straddle.asp), may involve computing multiple margin requirements. Before trading, traders should check the margin requirements and ensure they can meet them if the market shifts.

## Strategies to Circumvent Option Margin Requirements

Some option positions, like long options, don't need margins, whether they are puts or calls. In other instances, traders can use several different strategies to avoid option margin requirements.

*   **Covered Calls and Covered Puts**: Covered calls and covered puts involve owning the underlying stock, which is used as collateral in the option position. For example, if you own 500 shares of QQQ, you can sell to open five contracts of QQQ [call options](https://www.investopedia.com/terms/c/calloption.asp) without any margin.
*   **Debit Spreads**: [Debit spreads](https://www.investopedia.com/terms/d/debitspread.asp) involve buying in-the-money options and selling out-of-the-money options. In this case, the right to exercise the long option at a more favorable [strike price](https://www.investopedia.com/terms/s/strikeprice.asp) offsets the obligation to sell at the less favorable strike price, which means that no margin is required.

## Methods for Calculating Option Margin Requirements

The easiest way to calculate option margin requirements is using the [Chicago Board of Options Exchange (CBOE)](https://www.investopedia.com/terms/c/cboe.asp) [Margin Calculator](http://www.cboe.com/trading-tools/calculators/margin-calculator) that provides exact margin requirements for specific trades. Traders can also see the minimum requirements in the CBOE's [Margin Manual](https://www.cboe.com/learncenter/pdf/margin2-00.pdf). Brokerage accounts may have similar tools available to provide an idea of the cost before entering into a trade.

## The Bottom Line

Option margin requires traders to post cash or securities as collateral before writing or selling options, with requirements set by regulators like the Federal Reserve and FINRA but varying by broker and strategy.

Approaches such as covered calls or debit spreads can reduce or eliminate margin needs, helping preserve capital. Traders can use tools like the CBOE Margin Calculator to estimate requirements and manage profitability effectively.

> **Article Sources**
>
> 1.  National Archives, Code of Federal Regulations. "[Part 220 - Credit by Brokers and Dealers (Regulation T)](https://www.ecfr.gov/current/title-12/chapter-II/subchapter-A/part-220)."
>     
> 2.  FINRA. "[Margin Account Requirements](https://www.finra.org/rules-guidance/key-topics/margin-accounts)."