Key Takeaways
- Regulation T sets initial margin requirements for options.
- Margin requirements vary based on the type of options strategy.
- Supervisors must monitor margin levels and issue margin calls when necessary.
- Options margin rules differ from equity margin requirements.
- Special margin rules apply to spreads, straddles, and combinations.
Options Margin Requirements
As a supervisor, you must understand and monitor margin requirements for options accounts. Proper margin supervision helps protect both the customer and the firm from excessive risk.
Regulation T and Options
Regulation T (Reg T) of the Federal Reserve Board governs initial margin requirements. For options, the rules differ from standard equity margin.
Key Margin Concepts
| Term | Definition |
|---|---|
| Initial Margin | Amount required when position is established |
| Maintenance Margin | Minimum equity required to maintain position |
| Margin Call | Demand for additional funds when equity falls below minimum |
| Margin Deficiency | Amount by which account equity falls short |
Option Buyer Margin Requirements
Option buyers have limited risk and straightforward margin requirements:
Long Options (Calls and Puts)
| Requirement | Rule |
|---|---|
| Initial Margin | 100% of premium (full payment required) |
| Reg T Credit | No credit extended for long options |
| Maintenance | Not applicable (fully paid) |
Key Point: Long options must be paid for in full. They cannot be purchased on margin because their value can go to zero.
Option Writer Margin Requirements
Option writers (sellers) face potentially unlimited risk and have more complex margin requirements:
Uncovered (Naked) Equity Options
For uncovered options, the margin requirement is the greater of:
Method 1 (Standard Calculation):
- Premium received
- PLUS 20% of underlying stock value
- MINUS out-of-the-money amount (if any)
Method 2 (Minimum):
- Premium received
- PLUS 10% of underlying stock value (calls) or exercise price (puts)
Example: Uncovered Call Margin
An investor writes 1 uncovered call at $5 when the stock is at $50:
| Component | Calculation |
|---|---|
| Premium received | $500 |
| 20% of stock value | $1,000 (20% × $5,000) |
| Out-of-money amount | $0 (at-the-money) |
| Total Required | $1,500 |
Covered Option Positions
Covered positions have reduced margin requirements because the underlying security provides collateral:
Covered Call Writing
| Requirement | Amount |
|---|---|
| Margin | Margin on underlying stock only |
| Premium | May be applied to purchase price |
| Maintenance | Standard stock maintenance |
Cash-Secured Puts
| Requirement | Amount |
|---|---|
| Cash | Full exercise value must be deposited |
| Example | 50 strike put = $5,000 cash required |
Spread Margin Requirements
Spreads have defined maximum risk, so margin is calculated based on that risk:
Credit Spreads
| Spread Type | Margin Requirement |
|---|---|
| Bull Put Spread | Difference between strikes minus net credit |
| Bear Call Spread | Difference between strikes minus net credit |
Debit Spreads
| Spread Type | Margin Requirement |
|---|---|
| Bull Call Spread | Net debit (premium paid) |
| Bear Put Spread | Net debit (premium paid) |
Supervisor Margin Responsibilities
Daily Monitoring Requirements
- Review margin reports - Check all accounts daily
- Issue margin calls - Notify customers of deficiencies
- Track deadlines - Monitor response timeframes
- Approve extensions - If permitted by firm policy
- Order liquidations - If margin calls not met
Margin Call Procedures
| Step | Action |
|---|---|
| Day 1 | Identify deficiency, issue margin call |
| Day 2-4 | Customer must deposit funds or securities |
| Day 5 | Liquidate if call not met |
What is the margin requirement for purchasing long call options?
For an uncovered equity call option, the margin requirement is the greater of two calculations. One method requires premium plus 20% of underlying value minus any out-of-the-money amount. What is the minimum margin requirement under the alternative method?