Calculation and mechanics
How high the margin is depends on the rule set and the broker. Under Reg T, the Federal Reserve's regulation on securities credit, fixed rules apply to single positions and recognized option combinations. Brokers can require stricter rates of their own. For many US stocks the initial margin is 50% of the purchase value, the maintenance margin under FINRA rules at least 25%, many brokers require more. For an uncovered short option on a stock, CBOE rules require the current option value, at opening the premium received, plus 20% of the stock price, less the amount by which the option is out of the money, but at least the option value plus 10% of the strike for puts respectively of the stock price for calls.
For a credit spread with defined risk, the strike difference times the contract multiplier usually applies under Reg T. Since the premium collected sits in the account, the spread effectively ties up the strike difference less the premium, which is its max loss. A debit spread is fully paid and needs no further margin. For futures and options on futures, the exchange and clearing house set the margin per contract and brokers can require more. The amounts are adjusted when volatility changes.
Portfolio margin derives the margin from stress scenarios instead: related positions are valued together across price and volatility moves within set ranges that depend on the product group and the largest loss counts. Offsetting positions net against each other. Hedges can lower the margin if the model recognizes them as an offset. Under both rule sets the margin can change over the life of a position, for example through price moves, changing option values or new positions.
Distinction
Max loss describes the largest theoretical loss of a position at expiration, margin the collateral the broker requires for it today. For spreads both values are close, for uncovered options the margin is usually far smaller than the possible loss.
Margin is not part of the net liquidation value but is set against the account value. If the maintenance margin rises above the loanable account value (equity with loan value), the broker can close positions without asking. The reserve in between is called excess liquidity at Interactive Brokers, its share of the net liquidation value the cushion. In strong market moves it can shrink from two sides, when the account value falls and the margin rises at the same time.
Sources
- Federal Reserve: Regulation T (12 CFR 220), legal text in the eCFR
- FINRA Rule 4210: margin requirements
- CBOE: options margin, with margin manual and examples
Related terms
- Net Liquidation Value (NLV, account value, net liquidation)
- Max Loss (Maximum loss, max loss (limited), option max loss)
- Premium/Margin (Return on margin, remaining/margin p.a., remaining yield)
- Sold Premium (Short premium, sold option premiums)
- Contract Multiplier (Multiplier)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.