Margin Requirements Explained

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Options Margin Requirements

TradeStation Securities, Inc.

Margin Requirements (Applies to Stock & Index Options)

Greater of these 3 values:

  1. 100% of the option proceeds + (20% of the Underlying Market Value) – (OTM Value)
  2. 100% of the option proceeds + (10% of the Underlying Market Value)
  3. 100% of the option proceeds + ($100/contract)

Greater of these 3 values:

  1. Market value of the option + (20% of the Underlying Market Value) – (OTM Value)
  2. Market value of the option + (10% of the Underlying Market Value)
  3. Market value of the option + ($100/contract)

Greater of these 3 values:

  1. 100% of the option proceeds + (20% of the Underlying Market Value) – (OTM Value)
  2. 100% of the option proceeds + (10% of the Strike Price x Multiplier x Contracts)
  3. 100% of the option proceeds + ($100/contract)

Greater of these 3 values:

  1. Market value of the option + (20% of the Underlying Market Value) – (OTM Value)
  2. Market value of the option + (10% of the Strike Price x Multiplier x Contracts))
  3. Market value of the option + ($100/contract)

Greater of these 2 values:

  1. Requirement Naked Calls
  2. Requirement Naked Puts

+ Premium Other Options

Greater of these 2 values:

  1. Requirement Naked Calls
  2. Requirement Naked Puts

+ Market Value Other Options

Greater of these 2 values:

  1. Requirement Naked Calls
  2. Requirement Naked Puts

+ Premium Other Options

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Greater of these 2 values:

  1. Requirement Naked Calls
  2. Requirement Naked Puts

+ Market Value Other Options

Bull (Credit) Put Spread & Bear (Debit) Put Spread.

Intervals between strike prices equal. All legs with the same expiration date.

Position Margin Accounts Cash Accounts
Initial 1 Maintenance 2
Long Call Buy Call 100% Cost of the Option N/A 100% Cost of the Option
Long Put /
Protective Put
Buy Put/Buy Put and Buy Underlying 100% Cost of the Option N/A 100% Cost of the Option
Covered OTM 3
Call
Buy Stock trading at P and Sell Call with Strike Price > P Requirement Long Stock (marked to market) Requirement Long Stock (marked to market) Requirement Long Stock (marked to market)
Covered ITM 4
Call
Buy Stock trading at P and Sell Call with Strike Price 3 Put Short Stock trading at P and Sell Put with Strike Price 4
Put
Short Stock trading at P and Sell Put with Strike Price > P Requirement Short Stock (marked to market) +100% Put ITM Value Requirement Short Stock (marked to market) +100% Put ITM Value N/A
Cash-Covered
Put
Short Put with enough cash to cover exercise N/A N/A (Strike Price x Multiplier x Contracts) — Premium Proceeds
Naked Call Short Call N/A
Naked Put Short Put N/A
Bear (Credit)
Call Spread
Buy Call and Short Call (Strike Price Long Call > Strike Price Short Call) Net Premium + (Strike Price Long Call – Strike Price Short Call) x Contracts x Multiplier (Strike Price Long Call – Strike Price Short Call) x Contracts x Multiplier Net Premium + (Strike Price Long Call – Strike Price Short Call) x Contracts x Multiplier
Bull (Credit)
Put Spread
Buy Put and Short Put (Strike Price Long Put Strike Price Short Put) Net Premium N/A Net Premium
Long Straddle Buy Call and Buy Put with the same Strike Price 100% Cost of the Options N/A 100% Cost of the Options
Short Straddle Short Call and Short Put with the same Strike Price N/A
Long Strangle Buy Call and Buy Put with different Strike Prices 100% Cost of the Options N/A 100% Cost of the Options
Short Strangle Short Call and Short Put with different Strike Price N/A
Long (Debit) Butterfly Call Spread Bear (Credit) Call Spread & Bull (Debit) Call Spread.

Short calls with the same strike price. Intervals between strike prices equal. All legs with the same expiration date.

Net Premium N/A Net Premium
Short (Credit) Butterfly Call Spread Bull (Debit) Call Spread & Bear (Credit) Call Spread.

Long calls with the same strike price. Intervals between strike prices equal. All legs with the same expiration date.

Requirement Bear (Credit) Call Spread Requirement Bear (Credit) Call Spread Requirement Bear (Credit) Call Spread
Long (Debit) Butterfly Put Spread Bear (Debit) Put Spread & Bull (Credit) Put Spread.

Short puts with the same strike price. Intervals between strike prices equal. All legs with the same expiration date.

Net Premium N/A Net Premium
Short (Credit) Butterfly Put Spread Bull (Credit) Put Spread & Bear (Debit) Put Spread.

Long puts with the same strike price. Intervals between strike prices equal. All legs with the same expiration date.

Requirement Bull (Credit) Put Spread Requirement Bull (Credit) Put Spread Requirement Bull (Credit) Put Spread
Long (Debit) Condor Call Spread Bear (Credit) Call Spread & Bull (Debit) Call Spread.

Intervals between spread strike prices equal. All legs with the same expiration date.

Net Premium N/A Net Premium
Short (Credit) Condor Call Spread Bull (Debit) Call Spread & Bear (Credit) Call Spread.

Intervals between spread strike prices equal. All legs with the same expiration date.

Requirement Bear (Credit) Call Spread Requirement Bear (Credit) Call Spread Requirement Bear (Credit) Call Spread
Long (Debit) Condor Put Spread Bear (Debit) Put Spread & Bull (Credit) Put Spread.

Intervals between spread strike prices equal. All legs with the same expiration date.

Net Premium N/A Net Premium
Short (Credit) Condor Put Spread Requirement Bull (Credit) Put Spread Requirement Bull (Credit) Put Spread Requirement Bull (Credit) Put Spread
Long (Debit) Iron Butterfly Bull (Debit) Call Spread & Bear (Debit) Put Spread. Long Call and long Put legs with the same strike price. Net Premium N/A Net Premium
Short (Credit) Iron Butterfly Bear (Credit) Call Spread & Bull (Credit) Put Spread. Short Call and Short Put legs with the same strike price. Greater of these 2 values:

  1. Requirement Bear (Credit) Call Spread
  2. Requirement Bull (Credit) Put Spread
Greater of these 2 values:
  1. Requirement Bear (Credit) Call Spread
  2. Requirement Bull (Credit) Put Spread
Greater of these 2 values:
  1. Bear (Credit) Call Spread
  2. Bull (Credit) Put Spread
Long (Debit) Iron Condor Bull (Debit) Call Spread & Bear (Debit) Put Spread. Net Premium N/A Net Premium
Short (Credit) Iron Condor Bear (Credit) Call Spread & Bull (Credit) Put Spread. Greater of these 2 values:

  1. Bear (Credit) Call Spread
  2. Bull (Credit) Put Spread
Greater of these 2 values:
  1. Bear (Credit) Call Spread
  2. Bull (Credit) Put Spread
Greater of these 2 values:
  1. Bear (Credit) Call Spread
  2. Bull (Credit) Put Spread
  1. Requirement to place the trade.
  2. Requirement to maintain the position overnight.
  3. OTM = Out-of-the-money.
  4. ITM = In-the-money. ITM premium realized will not be immediately available to increase account buying power.
  • A minimum available equity of $2,000 is required to initiate any new option positions.
  • A minimum available equity of $5,000 is required for option strategies (e.g., spreads) and uncovered options. The liquidation value of options is not included when calculating equity
  • When purchasing options, the TradeStation platform looks at the inside National Best Bid and Offer (“NBBO”) when determining the estimated cost of the option purchase and does not account for any changes in the NBBO. When placing a market order to purchase on an option, it is possible to spend more than the available cash in your account. Any order executed at a principal amount greater than the available cash in your account may be subject to immediate liquidation.

Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. There is a possibility that you may sustain a loss equal to or greater than your entire investment regardless of which asset class you trade (equities, options or futures); therefore, you should not invest or risk money that you cannot afford to lose. Online trading is not suitable for all investors. View the document titled Characteristics and Risks of Standardized Options. Before trading any asset class, customers must read the relevant risk disclosure statements on our Other Information page. System access and trade placement and execution may be delayed or fail due to market volatility and volume, quote delays, system and software errors, Internet traffic, outages and other factors.

Equities, equities options, and commodity futures products and services are offered by TradeStation Securities, Inc. (Member NYSE, FINRA, CME and SIPC). TradeStation Securities, Inc.’s SIPC coverage is available only for securities, and for cash held in connection with the purchase or sale of securities, in equities and equities options accounts.

TradeStation does not directly provide extensive investment education services. However, useful investment and trading educational presentations and materials can be found on TradeStation’s affiliate’s site, YouCanTrade.com, which is owned by You Can Trade, Inc., an investment education media company.

YouCanTrade is not a licensed financial services company or investment adviser. Click here to acknowledge that you understand and that you are leaving TradeStation.com to go to YouCanTrade.

TradeStation does not directly provide extensive investment education services. However, useful investment and trading educational presentations and materials can be found on TradeStation’s affiliate’s site, YouCanTrade.com, which is owned by You Can Trade, Inc., an investment education media company.

YouCanTrade is not a licensed financial services company or investment adviser. Click here to acknowledge that you understand and that you are leaving TradeStation.com to go to YouCanTrade.

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TradeStation Securities, Inc. is an SEC-licensed broker dealer and a CFTC-licensed futures commission merchant (FCM), and a member of FINRA, SIPC, CME, NFA and several equities and futures exchanges, which offers to self-directed investors and traders Equities accounts for stocks, exchange-traded products (such as ETFs) and equity and index options, and Futures accounts for commodity and financial futures and futures options (TradeStation Securities does not offer Crypto accounts).

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TradeStation Crypto accepts only cryptocurrency deposits, and no cash (fiat currency) deposits, for account funding. In order for you to purchase cryptocurrencies using cash, or sell your cryptocurrencies for cash, in a TradeStation Crypto account, you must also have qualified for, and opened, a TradeStation Equities account with TradeStation Securities so that your cryptocurrency purchases may be paid for with cash withdrawals from, and your cryptocurrency cash sale proceeds may be deposited in, your TradeStation Securities Equities account. Therefore, if you want to open a TradeStation Crypto account, you must also have an Equities account with TradeStation Securities. This cash in your TradeStation Securities Equities account may also, of course, be used for your equities and options trading with TradeStation Securities.

TradeStation and YouCanTrade account services, subscriptions and products are designed for speculative or active investors and traders, or those who are interested in becoming one. No offer or solicitation to buy or sell securities, securities derivative or futures products of any kind, cryptocurrencies or other digital assets, or any type of trading or investment advice, recommendation or strategy, is made, given or in any manner endorsed by any TradeStation Group company, and the information made available on or in any TradeStation Group company website or other publication or communication is not an offer or solicitation of any kind in any jurisdiction where such TradeStation Group company or affiliate is not authorized to do business. Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. There is a possibility that you may sustain a loss equal to or greater than your entire investment regardless of which asset class you trade (equities, options, futures, futures options, or crypto); therefore, you should not invest or risk money that you cannot afford to lose. System access and trade placement and execution may be delayed or fail due to market volatility and volume, quote delays, system, platform and software errors or attacks, internet traffic, outages and other factors. The trademarks “TradeStation®,” “YouCanTrade” and “SheCanTrade,” as well as other trademarks, domain names and other proprietary intellectual property of TradeStation Group companies, are owned by TradeStation Technologies. The proprietary TradeStation platform is offered by TradeStation Securities for Equities (including equity options) and Futures trading. TradeStation Crypto offers its online platform trading services, and TradeStation Securities offers futures options online platform trading services, through unaffiliated third-party platform applications and systems licensed to TradeStation Crypto and TradeStation Securities, respectively, which are permitted to be offered by those TradeStation companies for use by their customers.

Please also read carefully the agreements, disclosures, disclaimers and assumptions of risk presented to you separately by TradeStation Securities, TradeStation Crypto, TradeStation Technologies, and You Can Trade on the TradeStation Group company site and the separate sites, portals and account or subscription application or sign-up processes of each of these TradeStation Group companies. They contain important information, rights and obligations, as well as important disclaimers and limitations of liability, and assumptions of risk, by you that will apply when you do business with these companies.

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Reading time: 9 minutes

This article will address several questions pertaining to Margin within Forex trading, such as: What is Margin? What is free margin in Forex?’ and What is Margin level in Forex? Every broker has differing margin requirements and offers different things to traders, so it’s good to understand how this works first, before you choose a broker and begin trading with a margin.

What Does Margin Mean?

Margin is one of the most important concepts of Forex trading. However, a lot of people don’t understand its significance, or simply misunderstand the term. A Forex margin is basically a good faith deposit that is needed to maintain open positions. A margin is not a fee or a transaction cost, but instead, a portion of your account equity set aside and assigned as a margin deposit.

Trading on a margin can have varying consequences. It can influence your trading experience both positively and negatively, with both profits and losses potentially being seriously augmented. Your broker takes your margin deposit and then pools it with someone else’s margin Forex deposits. Brokers do this in order to be able to place trades within the whole interbank network.

A margin is often expressed as a percentage of the full amount of the chosen position. For instance, most Forex margin requirements are estimated to be around: 2%, 1%, 0.5%, 0.25%. Based on the margin required by your FX broker, you can calculate the maximum leverage you can wield in your trading account.

You can see how margin, or the level of leverage you use, can affect your potential profits and losses in our Forex leverage infographic below.

(Note that the leverage shown in Trades 2 and 3 is available for Professional clients only. A Professional client is a client who possesses the experience, knowledge and expertise to make their own investment decisions and properly assess the risks that these incur. In order to be considered to be Professional client, the client must comply with MiFID ll 2020/65/EU Annex ll requirements.)

What is a Free Margin in Forex?

Free margin in Forex is the amount of money that is not involved in any trade. You can use it to take more positions, however, that isn’t all – as the free margin is the difference between equity and margin. If your open positions make you money, the more they achieve profit, the greater the equity you will have, so you will have more free margin as a result. There may be a situation when you have some open positions and also some pending orders simultaneously.

The market then wants to trigger one of your pending orders but you may not have enough Forex free margin in your account. That pending order will either not be triggered or will be cancelled automatically. This can cause some traders to think that their broker failed to carry out their orders. Of course in this instance, this just isn’t true. It’s simply because the trader didn’t have enough free margin in their trading account.

What is a Forex Margin Level?

In order to understand Forex trading better, one should know all they can about margins. Forex margin level is another important concept that you need to understand. The Forex margin level is the percentage value based on the amount of accessible usable margin versus used margin. In other words, it is the ratio of equity to margin, and is calculated in the following way:

  • Margin level = (equity/used margin) x 100.

Brokers use margin levels in an attempt to detect whether FX traders can take any new positions or not. Different brokers have varying limits for the margin level, but most will set this limit at 100%. This limit is called a margin call level. Technically, a 100% margin call level means that when your account margin level reaches 100%, you can still close your positions, but you cannot take any new positions.

As expected, an 100% margin call levels occur when your account equity is equal to the margin. This usually happens when you have losing positions and the market is swiftly and constantly going against you. When your account equity equals the margin, you will not be capable of taking any new positions.

So now that we’ve established what margin level is, what is margin in Forex? We’ll use an example to answer this question:

    Imagine that you have $10,000 on your account account, and you have a losing position with a margin evaluated at $1,000. If your position goes against you, and it goes to a $9,000 loss, the equity will be $1,000 (i.e $10,000 – $9,000), which equals the margin. Thus, the margin level will be 100%. Again, if the margin level reaches the rate of 100%, you can’t take any new positions, unless the market suddenly turns around and your equity level turns out to be greater than the margin.

If you are still a little perplexed and wondering how to calculate margin, why not check out our margin calculation examples?

Let’s presume that the market keeps on going against you. In this case, the broker will simply have no choice but to shut down all your losing positions. This limit is referred to as a stop out level. For example, when the stop out level is established at 5% by a broker, the trading platform will start closing your losing positions automatically if your margin level reaches 5%. It is important to note that it starts closing from the biggest losing position.

Often, closing one losing position will take the margin level Forex higher than 5%, as it will release the margin of that position, so the total used margin will decrease and consequently the margin level will increase. The system often takes the margin level higher than 5%, by closing the biggest position first. If your other losing positions continue losing and the margin level reaches 5% once more, the system will just close another losing position.

The reason why brokers close positions when the margin level reaches the stop out level is because they cannot permit traders to lose more money than they have deposited into their trading account. The market could potentially keep going against you forever, and the broker cannot afford to pay for this sustained loss.

What is a Margin Call in Forex?

A margin call is perhaps one of the biggest nightmares professional Forex traders can have. This happens when your broker informs you that your margin deposits have simply fallen below the required minimum level, owing to the fact that the open position has moved against you.

Trading on margin can be a profitable Forex strategy, but it is important to understand all the possible risks. You should make sure you know how your margin account operates, and be sure to read the margin agreement between you and your selected broker. If there is anything you are unclear about in your agreement, ask questions and make sure everything is clear.

There is one unpleasant fact for you to take into consideration about the margin call Forex. You might not even receive the margin call before your positions are liquidated. If the money in your account falls under the margin requirements, your broker will close some or all positions, as we have specified earlier in this article. This can actually help prevent your account from falling into a negative balance.

How can you avoid this unanticipated surprise? Margin calls can be effectively avoided by carefully monitoring your account balance on a regular basis, and by using stop-loss orders on every position to minimise the risk. Another smart action to consider is to implement risk management within your trading. By managing your the potential risks effectively, you will be more aware of them, and you should also be able to anticipate them and potentially avoid them altogether.

Margins are a hotly debated topic. Some traders argue that too much margin is very dangerous, however it all depends on trading style and the amount of trading experience one has. If you are going to trade on a margin account, it is important that you know what your broker’s policies are on margin accounts, and that you fully understand and are comfortable with the risks involved. Be careful to avoid a Forex margin call.

Additionally, most brokers require a higher margin during the weekends. In fact, this might take the form of a 1% margin during the week and if you want to hold the position over the weekend, it may rise to 2% or higher.

Conclusion

As you may now come to understand, FX margins are one of the key aspects of Forex trading that must not be overlooked, as they can potentially lead to unpleasant outcomes. In order to avoid them, you should understand the theory concerning margins, margin levels and margin calls, and apply your trading experience to create a viable Forex strategy. Indeed a well developed approach will undoubtedly lead you to trading success in the end.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Understanding Margin Requirements for Selling Naked Puts

If you plan to sell put options, you need to understand the margin requirements. So we’re going to lay out the trading authorizations your broker will require in order for you to execute this type of trade and explain the margin requirements.

We frequently employ a strategy whereby we sell a put option to pay for a call option. We identify these trades as credit or debit spreads. This strategy works well when stocks are appreciating, say options trading articles. When call premium is high, selling puts to reduce the cost of the trade greatly improves the likelihood of earning a profit and enhances your return.

We know it can be frustrating to buy a call on a stock that goes up and the call loses money. Much of the time, the implied volatility priced into the options was greater than the realized volatility of the stock. As a result, the stock can rise and the option expires with little or no value.

The downside of selling a put to buy a call is that you are exposed to potentially escalating losses if the stock declines below the put strike price. At expiration, if the stock depreciates below the put strike price, you are very likely to be put the stock and assume the loss represented by the amount the stock price is below the put strike less the net premium collected.

Understanding Naked Put Selling Margin Requirements

For our examples we’ll use Charles Schwab margin requirements because they are higher than the minimums required by the Financial Industry Regulatory Authority (FINRA) and the option exchanges for option trades on basic stock. Schwab’s margin requirements are representative of the industry. You should check the specific requirements of your broker to know exactly what margin standards they apply.

Please note: Having margin clearance within your brokerage account does not mean you will be forced to go on margin with your options trades. If you have enough cash or stock holdings within your account to cover the margin requirements, then a trade will not trigger the activation of the margin (borrowing capacity) that is available to you.

Options Trading Approval From Your Broker

When you open your account with a broker, you should request options trading authorization. At Schwab, they classify options trading clearance with four categories of approvals ranging from 0 to 3. (For more on this, see Option Approval Levels Explained.)

To buy calls, you will need to obtain at least Level 1 approval. As explained below, you can also sell naked puts with Level 1 clearance, but the margin requirements are much higher than if you have Level 3 trading authorization. If you have the necessary experience, we highly recommend you obtain Level 3 approval.

Our “spread” trade is a two-legged trade; we buy a call and sell a put. In the industry, this is often referred to as a risk-reversal trade.

The first leg of our trade involves buying a call. When you buy a call, your total risk is the amount of dollars you paid when you initiated the trade. Even if the stock goes to zero, you will have no additional liability. You will also have lost all of your initial investment. Again, if you trade with Schwab, you will be required to have Level 1 trading approval.

The other leg of our trade involves selling a put naked. Before you can consider selling a put naked, you must have:

* An account balance of at least $25,000 net equity value.

* Schwab’s Level 1 options trading authority to sell a put naked on a cash-secured basis

* Schwab’s Level 3 options trading authority to sell a put naked on margin.

Schwab does allow investors to sell puts naked on a cash-secured basis in an IRA account as long as they have Level 1 options trading authority and the account has more than $25,000 of net equity value.

What is Cash Secured?

Selling a put to open on a cash-secured basis requires that you carry the full potential cash obligation of the trade in your account.

For example, if you sell to open 10 contracts of the Palm (PALM) May 5 Puts on a cash-secured basis, Schwab requires that you have $5,000 in your account (10 contracts x 100 shares per contract x $5 stock price = $5,000 — see the sample transactions below). If you are put the stock at $5, having the cash in your account insures that you will be able to honor your purchase obligation.

Naked Put Selling on Equities — Level 3 Margin Requirements (Schwab)

Stocks $5 and Greater

The good news is the margin requirement if you have Level 3 clearance is substantially less than the cash-secured requirement. The bad news is calculating Schwab’s Level 3 margin requires doing a bit more math.

The margin required with Level 3 approval usually is the solution for the following equation:

(25% of the underlying stock’s market value + the option ask price – any out-of-the money amount) x 100 (per contract) x the number of contracts

The value of the above equation must be greater than:

* (The option ask price + 10% of the stock’s current trading price) x 100 (per contract) x the number of contracts, or

* The number of contracts x $500 per contract.

If either of these two calculations yield a higher margin amount, then the highest value is used.

Stocks Less Than $5

For stocks that are trading below $5, selling naked puts is done on a cash-secured basis in all accounts.

Example Margin Calculations

The following four examples cover stocks than range in price from $2 to $65. Schwab’s margin requirement is shown in the black box in the column entitled “Margin Required”

Exceptions

The margin requirements shown above are for equities and narrow based indexes. Broad-based indexes have lower margin requirements. Double- and triple-levered ETFs have much higher margin requirements.

In any event, always check with your broker on current margin requirements. FINRA, option exchanges and brokers change their margin requirements periodically.

If you are an experienced trader comfortable with going on margin, this can be a good tool in your trading arsenal.

But we want to emphasize again, having margin clearance within your brokerage account does not mean you will be forced to go on margin with your options trades. If you have enough cash or stock holdings within your account to cover the margin requirements, then a trade will not trigger the activation of the margin (borrowing capacity) that is available to you.

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