What is option margin?

Option margin is a pivotal concept in options trading. It refers to the amount a trader needs to deposit with a brokerage to cover potential losses on option positions. This margin acts as collateral, ensuring traders can cover losses. Options trading is leveraged, allowing traders to manage more securities with less capital.

Why is margin trading important?

Understanding margins is critical for effective risk management in options and margin trading. Margin trading can offer significant benefits but requires careful management to avoid excessive losses. Options provide strategic flexibility, though they require a solid understanding of underlying mechanisms to use effectively.

What are margin requirements?

Margin requirements are set by brokers to mitigate associated risks. Call Options: Buying a call option requires paying the premium, with no additional margin needed. However, selling call options invokes margin requirements to cover potential losses. Put Options: Like call options, buying a put only requires paying the premium.