Key Takeaways

● Major markets in the world reduce margin requirements for options strategies.

● Most options strategies enjoy reduced margin requirements.

● This mechanism makes funds in your account potentially more productive.

Understanding

In many global capital markets, the margin requirements for options strategies, or option combinations, are lower than the requirements for the individual option trades combined.

The lower margin required for options strategies enhances funds' efficiency, lowers costs, and boosts options trading.

Options strategies applied

Simply put, for a combination that involves options of the same expiration, its margin requirement is lower than that of separate trades combined if the options strategy has a theoretical maximum loss.

This mechanism is applied to most options strategies, including covered call, vertical spread, calendar spread, diagonal spread, straddle, strangle, butterfly, condor, iron butterfly, and iron condor.

How margin requirements are reduced for options combinations

The amount of margin reduced for different options strategies varies.

Take option spreads as an example.

If a debit spread (buy options at a higher strike price and sell at a lower strike) is executed, no margin is required for the short position.

If a credit spread (buy options at a lower strike price and sell at a higher strike) is executed, the margin is determined by the strike prices.

If a trader buys options before shorting options of the same underlying asset, no margin is required for the short sale when the two trades form a debit spread strategy.

Effects of Reduced Margin Requirements

The reduction in margin requirements improves the efficiency of funds in your account.

On the one hand, retail investors' portfolios have a higher potential return when the margin requirements are lower.

On the other hand, trading activity in the options market is likely to be boosted as more institutional investors enter the market for higher potential returns.

However, investors should never ignore the higher risk involved as they build a bigger position.

If the funds in your account are lower than the margin requirement, i.e., a margin call occurs, you may be forced to close out the position in your options strategy.