Understanding Margin Requirements for Selling Naked Puts

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Margin is a very widely used word in financial terms, but it's unfortunately a word that is often very confusing for people. This is largely because it has a number of different meanings, depending on what context it is being used in. In particular, the meaning of the term as used in options trading is very different to the meaning of the term as used in stock trading. The phrase profit margin is also a common term, and that means something else again. On this page we explain what the term margin means in these different contexts, and provide details of how it's used in options trading.

Profit margin is a term that is commonly used margin loans for trading options without a financial sense in a margin loans for trading options without of different situations. The simplest definition of the term is that it's the difference between income and costs and there are actually two types of profit margin: Gross profit margin is income or revenue minus the direct costs of making that income or revenue.

For example, for a company that makes and sells a product, their gross profit margin will be the amount of revenue they receive for selling the product minus the costs of making that product. Their net margin is income or revenue minus the direct costs and the indirect costs. Investors and traders can also use the term profit margin to describe the amount of money made on any particular investment.

For example, if an investor buys stocks and later sells those stocks at a profit, their gross margin would be the difference between what they sold at and what they bought at. Their net margin would be that difference minus the costs involved of making the trades.

Profit margin can be expressed as either a percentage or an actual amount. You may hear people refer to buying stocks on margin, and this is basically borrowing money from your broker to buy more stocks. If you have a margin account with your stock broker, then you will be able to buy more stocks worth more money than you actually have in your account.

Margin loans for trading options without you do buy stocks in this manner and margin loans for trading options without go down in value, then you may be subject to a margin call, which means you must add more funds into your account to reduce your borrowings. Margin is essentially a loan from your broker and you will be liable for interest on that loan. The idea of buying stocks using this technique is that the profits you can make from buying the additional stocks should be greater than the cost of borrowing the money.

You can also use margin in stock trading to short sell stocks. Margin in futures trading margin loans for trading options without different from in stock trading; it's an amount of money that you must put into your brokerage account in order to fulfill any obligations that you may incur through trading futures contracts. This is required because, margin loans for trading options without a margin loans for trading options without trade goes wrong for you, your broker needs money on hand to be able to cover your losses.

Your position on futures contracts is updated at the end of the day, and you may be required to add additional funds to your account if your position is moving against you. The first sum of money you put in your account to cover your position is known as the initial margin, and any subsequent funds you have to add is known as the maintenance margin. In options trading, margin loans for trading options without is very similar to what it means in futures trading because it's also an amount of money that you must put into your account with your broker.

This money is required when you write contracts, to cover any potential liability you may incur. This is because whenever you write contracts you are essentially exposed to unlimited risk. For example, when you write call options on an underlying stock you may be required to sell that stock margin loans for trading options without the holder of those contracts.

If it was trading at a significantly higher price than the strike price of the contracts you had written, then you would stand to lose large sums of money. In order to ensure that you are able to cover that loss, you must have a certain amount of money in your trading account.

This allows brokers to limit their risk when they allow account holders to write options because when contracts are exercised and the writer of those contracts is unable to fulfill their obligations, it's the broker with whom they wrote them that is liable. Although there are guidelines set for brokers as to the level of margin margin loans for trading options without should take, it's actually down to the brokers themselves to decide. Because of this, the funds required to write contracts may vary from one broker to another, and they may also vary depend on your trading level.

However, unlike the requirements when trading futures, the requirement is always set as a fixed percentage and it isn't a variable that can change depending on how the market performs. It's actually possible to write options contracts margin loans for trading options without the need for a margin, and there are a number of ways in which you can do this. Essentially you need to have some alternative form of protection against any potential losses you might incur.

For example, if you wrote call options on an underlying stock and you actually owned that underlying stock, then there would be no need for any margin.

This is because if the underlying stock went up in value and the contracts were exercised you would be able to simply sell the holder of the contracts the stock that you already owned.

Although you would obviously be selling the stock at a price below the market value, there is no direct cash loss involved when the contracts are exercised.

You could also write put options without the need for a margin if you held a short position on the relevant underlying security. It's also possible to avoid the need for a margin when writing options by using debit spreads.

When you create a debit spread, you would usually be buying in the money options and then writing cheaper out of the money options to recover some of the costs of doing so. Assuming you buy the same amount of contracts as you write, your losses are limited and there is therefore no need for margin. There are a number of trading strategies that involve the use of debit spreads, which means there are plenty of ways to trade without the need for margin.

However, if you are planning on writing options that aren't protected by another position then you need to be prepared to deposit the required amount of margin with your options margin loans for trading options without. In reality, even if you are trading futures options this isn't something you really need to concern yourself with. However, you may hear the term used and it can be useful to know what it is.

The SPAN system was developed by the Chicago Mercantile Exchange inand is basically an algorithm that's used to determine the margin requirements that brokers should be asking for based on the likely maximum losses that a portfolio might incur.

SPAN calculates this by processing the gains and losses that might be made under various market conditions. As we have mentioned, it's far from essential that you understand SPAN and how it's calculated, but if you do trade futures options then the amount of margin your broker will require will be based on the SPAN system.

Full Explanation of Margin Margin is a very widely used word in financial terms, but it's unfortunately a word that is often very confusing for people. Section Contents Quick Links. Profit Margin Profit margin is a term that is commonly used in a financial sense in a variety of different situations.

Margin in Stock Trading You may hear people refer to buying stocks on margin, and this is basically borrowing money from your broker to buy more stocks. Margin in Futures Trading Margin in futures trading is different from in stock trading; it's margin loans for trading options without amount of money that you must put into your brokerage account in order to fulfill any obligations that you may incur through trading futures contracts.

Margin in Options Trading In options trading, margin is very similar to what it means in futures trading because it's also an amount of money that you must put into your account with your broker.

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Margin loans have many benefits, including lower rates and more flexibility than other types of borrowing. But they may not right for everyone. What is a margin loan and how does it work? Margin loans are personal loans that borrow against the securities in your portfolio, such as stocks, bonds and mutual funds, to get cash. Borrowing on margin is a tool that can potentially generate greater returns, execute investment strategies, and serve as a flexible source of low cost borrowing for personal financial needs.

Typically, margin loans are tied to a variable rate structure and offer more flexibility and more favorable rates than other borrowing sources. A margin loan can be a valuable financial tool in the right situation, but you should be aware that it can amplify both profits and losses.

The amount you can borrow on margin depends on the type and value of securities in your Biltmore portfolio. You must maintain equity in your portfolio, depending on the type of securities you hold. If you cannot meet your minimum, you could be subject to a margin call and we may have to sell securities form your portfolio, with or without your prior approval. Before borrowing on margin, be sure to discuss with your Biltmore Financial Advisor the risks associated with margin loans and have risk mitigation strategies in place.

The amount of money you can borrow on margin toward the purchase of securities is typically limited to 50 percent of the value of marginable securities in your account subject to eligible securities , but can increase for certain bonds. However, it is prudent to borrow less to minimize risk. Once you borrow on margin, you are required to maintain a certain amount of equity in your account, depending on the securities you hold.

Biltmore will calculate your buying power and cash available for withdrawal, and provide you with that information in your account summary. Because maintenance requirements are based on current market value of a stock, not your purchase price, a price decline in a marginable security will reduce your equity and potentially trigger a margin call in your account.

If that happens, you must promptly deposit the necessary cash or securities, or liquidate sufficient securities in the account, to satisfy the margin call.

For complete information on margin lending requirements, contact your Biltmore Financial Advisor. Margin loans can be used to purchase securities, or for a wide range of personal financial needs, including short-term borrowing and cash-flow needs:. Margin loans can offer more flexibility, ease of transaction and possibly lower rates than other types of borrowing.

You can replay a loan at your own pace, as long as you maintain the required equity in your portfolio. You might be able to deduct the interest against your net investment income. Margin loans are not right for everyone. Margin borrowing increases your level of market risk. If you purchase securities with a margin loan and the underlying value of those securities goes down, you must still repay your loan.

The interest on margin loans may be tax deductible against your net investment income. Investment interest expense is the interest on money you borrow to purchase taxable investments. The rules for deducting margin interest costs from personal income taxes can be complicated. Consult your tax advisor to understand the specifics regarding margin deductibility and how it may affect your specific situation. At Biltmore, we want our clients to fully understand both the benefits and risks of a margin loan strategy to determine if it makes sense for your individual situation.

Before borrowing on margin, you and your Biltmore Financial Advisor will discuss these risks and others associated with margin loans, such as the variable interest rate structure and hedging with interest rate locks through Swaps. Together, we can develop strategies to reduce these risks and take advantage of the low interest rates that Biltmore offers.

We can also work directly with your tax advisor to see if you qualify to deduct the interest on a margin loan. Margin Loan Guide What is a margin loan and how does it work? Initial Equity Requirements The amount of money you can borrow on margin toward the purchase of securities is typically limited to 50 percent of the value of marginable securities in your account subject to eligible securities , but can increase for certain bonds.

Maintenance Requirements Once you borrow on margin, you are required to maintain a certain amount of equity in your account, depending on the securities you hold. Use of Margin Loans Margin loans can be used to purchase securities, or for a wide range of personal financial needs, including short-term borrowing and cash-flow needs: Take advantage of market opportunities Defer capital gains taxes from selling securities Consolidate or refinance debt Pay off a higher rate mortgage or buy more property Help pay college costs Start a business Take a dream vacation Explore a passion Margin Loans Vs Other Lending Options Margin loans can offer more flexibility, ease of transaction and possibly lower rates than other types of borrowing.

Margin trading allows you to leverage the assets in your account to purchase more securities than you would be able to buy on a cash-only basis. Take advantage of timely market opportunities or make investment changes when you want, as long as you maintain the minimum equity required. Margin loans can be more cost-effective than credit cards or other lending options.

If you hold a concentrated stock position, you can use margin to diversify your portfolio. Ready line of credit. You can borrow on margin to meet personal financial needs whenever you want, without extra paperwork, credit checks or approvals. There are no minimum monthly payments on a margin loan as long as you maintain the required equity level in your account.

Tax Implications The interest on margin loans may be tax deductible against your net investment income. Margin Loan Risk Management Margin loans have many benefits, including lower rates and more flexibility than other types of borrowing. Strategies to Reduce Margin Risks Before borrowing on margin, you and your Biltmore Financial Advisor will discuss these risks and others associated with margin loans, such as the variable interest rate structure and hedging with interest rate locks through Swaps.