Notional value vs buying power: how much stock are you really on the hook for?
Buying power used is the amount your broker sets aside for a trade. Notional value is the full dollar amount of stock the option controls. On a margin put, the first can be a small slice of the second. Your real risk follows the notional, not the buying power.
The short answer
Look at three numbers before any short option, not one:
- Notional value: strike × 100. For a put, it's the stock you can be made to buy. A $100 put is $10,000 of stock.
- Buying power used: what your broker holds for the trade. On a cash-secured put, about the full notional. On a margin put, a fraction of it, set by your broker's formula.
- Max loss: the worst case. For a short put, the strike minus the premium, times 100, if the stock went to zero. For a spread, the width minus the credit, times 100.
Buying power tells you how many trades your account allows. Notional and max loss tell you what those trades can cost. The trap is sizing by buying power alone.
Notional value and Buying power each have a glossary page. This page puts them next to each other.
Side by side
One made-up stock, Summit Health, at $102 (hypothetical). Margin numbers are a made-up round figure; every broker sets its own.
| Cash-secured put | Margin-secured put | Put credit spread | |
|---|---|---|---|
| Trade | Sell $100 put for $2.00 | Sell $100 put for $2.00 | Sell $100 put, buy $95 put, for $1.50 |
| Notional value | $10,000 | $10,000 | $10,000 (the short leg) |
| Buying power used | About $10,000 in cash | $2,000 (hypothetical) | $350 at most brokers |
| Max loss | $9,800 | $9,800 | $500 − $150 = $350 |
| Can the hold grow later? | No, the cash is already set aside | Yes, as the stock falls | No, it's capped at the width |
Look at the middle column. It uses a fifth of the buying power of the cash-secured put. Its max loss is exactly the same: $9,800. The margin didn't make the trade smaller. It made it cheaper to open.
A worked example: five puts and a 30% drop (hypothetical)
You have a $25,000 account. Each margin put "uses" $2,000, so you sell five of the $100 puts for $2.00 each.
- Premium collected: 5 × $200 = $1,000.
- Buying power used: 5 × $2,000 = $10,000. The screen says you still have $15,000 free.
- Notional value: 5 × $10,000 = $50,000 of stock you can be made to buy, in a $25,000 account.
Then bad news. Here's what each price does to the five puts:
| Stock at expiry | Per put | Five puts |
|---|---|---|
| $102 | Expires: +$200 | +$1,000 |
| $90 | −$1,000 + $200 = −$800 | −$4,000 |
| $70 (30% below the strike) | −$3,000 + $200 = −$2,800 | −$14,000 |
At $70, the loss is $14,000. That's more than the $10,000 of buying power the trades were said to use, and more than half the account. Long before expiry, the broker's hold grows as the stock falls. That can mean a Margin call, or the broker closing positions for you at the worst prices.
Now the spread version. Five $100/$95 spreads for $1.50 each hold $1,750 of buying power. At $70, each loses its max of $350: −$1,750, and not a dollar more. Same notional, same drop, a loss you knew before you opened it.
Size short puts by notional value: "could I buy all of this stock at these strikes?" If the answer is no, the buying power number is lying to you.
Which number should you watch?
| Watch buying power when… | Watch notional value when… | Watch max loss when… |
|---|---|---|
| You check what the broker will let you open | You size short puts or covered calls | You compare a naked put to a spread |
| You track room for a margin call | You add up all your open positions | You decide what a bad month can cost |
Many sellers keep their total notional at or below their account size, even in a margin account. That's the cash-secured way of thinking without the cash-secured rule. More on this choice in cash-secured vs margin-secured puts, and what a market-wide drop does to five puts at once in the market crashed while I had five puts open.
In Canada, a TFSA or RRSP has no margin, so a short put there must be fully cash-secured if your broker allows puts at all. Options permissions differ by broker. Spreads usually need a higher options level.
The wheel strategy is built on cash-secured puts, so notional and buying power match. The options strategy comparison chart lists the capital tied up and the max loss for each strategy side by side.
Questions
What is the difference between notional value and buying power?
Notional value is the full dollar amount of stock an option controls: strike × 100. Buying power used is what your broker holds for the trade. On a margin put, buying power can be a small fraction of the notional.
Why does selling a put use so little buying power on margin?
The broker only holds enough to cover a typical move, not a drop to zero. As the stock falls, that hold grows. The full obligation, the notional, never shrank.
Is buying power reduction the same as max loss?
On a credit spread at most brokers, roughly yes. On a naked put, no: max loss is the strike minus the premium, which is far larger than the buying power held.
How do I calculate notional value for an option?
Multiply the strike by 100 for each contract. Five $100 puts are $50,000 of notional value, whatever your broker holds for them.
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