1.3 Options Margin Requirements
Key Takeaways
- Long options are not marginable: 100% of the premium must be paid because the value can go to zero.
- Naked equity option margin is the GREATER of a 20%-of-stock method less out-of-the-money amount, or a 10% minimum method.
- Covered calls require only the underlying stock's margin; cash-secured puts require the full strike value in cash.
- Spread margin equals the maximum loss: net debit for debit spreads, strike difference minus net credit for credit spreads.
- Reg T payment is due promptly (T+1 industry practice), and the supervisor monitors and acts on deficiencies daily.
Regulation T and the Long-Option Rule
Regulation T (Reg T) of the Federal Reserve Board governs the initial extension of credit; the exchanges (Cboe/FINRA) set maintenance margin. The first rule to memorize: long options must be paid in full — 100% of the premium. No credit is extended because an option can expire worthless, leaving no collateral. This differs from marginable stock, where Reg T allows 50% credit.
Exam trap: A long option with more than 9 months to expiration on a listed equity was historically marginable at 75%; the testable default the exam wants is 100% (full payment) for standard listed options.
Margin on Naked (Uncovered) Equity Options
Uncovered writers face open-ended risk, so margin is the greater of two computations:
| Method | Formula |
|---|---|
| Method 1 (standard) | Premium + 20% of underlying value − out-of-the-money amount |
| Method 2 (minimum) | Premium + 10% of underlying value |
Take the larger result. The 10% floor prevents a deep out-of-the-money option from requiring almost nothing.
Worked Example — Naked Call
Write 1 uncovered call, premium $5, stock at $50, strike $50 (at-the-money):
- Method 1: $500 + (20% × $5,000 = $1,000) − $0 OTM = $1,500
- Method 2: $500 + (10% × $5,000 = $500) = $1,000
- Requirement = greater = $1,500
Worked Example — Out-of-the-Money Naked Call
Write 1 call, premium $2, stock at $50, strike $60 ($10 OTM):
- Method 1: $200 + $1,000 − $1,000 OTM = $200
- Method 2: $200 + $500 = $700
- Requirement = greater = $700 (the 10% floor binds)
Covered and Cash-Secured Positions
| Position | Requirement |
|---|---|
| Covered call (own the stock) | Margin on the stock only; the short call adds nothing |
| Cash-secured put | Full strike value in cash (50 put = $5,000) |
A covered call writer's downside is the stock's, not the option's, so the call is fully collateralized by the shares deliverable on assignment.
Spread Margin Equals Maximum Loss
Spreads have defined risk, so margin equals that risk. The long leg must expire on or after the short leg to qualify for spread treatment.
| Spread | Margin required |
|---|---|
| Debit spread (bull call / bear put) | The net debit paid (that is the max loss) |
| Credit spread (bull put / bear call) | Strike difference − net credit received |
Worked credit spread: Sell 50 put / buy 45 put for a $2 net credit. Strike difference = $5 = $500; margin = $500 − $200 = $300, the maximum loss.
Supervisor Margin Duties
- Review daily margin/exception reports across all accounts.
- Issue a margin call when equity falls below the maintenance minimum.
- Track the customer's deposit deadline (Reg T payment is generally due T+1 under current industry practice; a Reg T extension may be requested).
- Order liquidation if the call is not met.
Exam trap: A long option cannot satisfy a margin call as collateral — it has no loan value.
Maintenance Margin vs. Initial Margin
Reg T sets the initial requirement; the exchanges and FINRA Rule 4210 set maintenance. For a naked equity option writer, the maintenance computation re-runs the same greater-of formula each day using the current stock price, so a rising stock against a short call steadily increases the requirement and can generate a maintenance margin call even though nothing was traded.
| Concept | Set by | Timing |
|---|---|---|
| Initial margin | Federal Reserve (Reg T) | When the position is opened |
| Maintenance margin | Exchanges / FINRA 4210 | Daily, on current values |
| Margin call | The firm | When equity falls below maintenance |
Straddles and Combinations
A short straddle (short call + short put, same strike) or short combination (different strikes) is margined on the greater of the two naked sides, plus the premium of the other side. You do not add two full naked requirements together.
Worked short straddle: Short 1 call and short 1 put, both struck $50, stock $50, each premium $4. Naked-call requirement (ATM) = $400 + $1,000 = $1,400; naked-put requirement = $400 + $1,000 = $1,400. Margin = greater side ($1,400) + the other side's premium ($400) = $1,800.
Supervisor Calculation Checklist
- Identify the position type — long, naked, covered, spread, or straddle — because each has a distinct rule.
- For naked equity options, run both the 20% method and the 10% floor and take the greater.
- For spreads, confirm the long leg expires on or after the short leg, then use net debit or strike-difference-minus-credit.
- For straddles, use the larger naked side plus the smaller side's premium.
- Compare account equity to the requirement daily and issue calls on deficiencies.
Reg T Payment, Extensions, and Liquidation
| Step | Detail |
|---|---|
| Payment due | Promptly; current industry practice is T+1 |
| Extension | Firm may request a Reg T extension from its DEA/FINRA |
| Frozen account | 90-day cash-up-front penalty for repeated Reg T violations |
| Liquidation | Firm sells to cover if the call is not met |
Exam trap: When a cash-account customer sells securities before paying for an earlier purchase (a free-ride), the account is frozen for 90 days, requiring cash up front before any buy. This is a recurring Series 9 supervisory fact even though it is not options-specific.
A customer writes one uncovered equity put. The premium is $3, the stock trades at $40, and the strike is $40 (at-the-money). Using the standard 20% method, what is the margin requirement?
What is the Regulation T margin requirement to purchase a standard listed long call option?