What is a margin requirement on a short option?
In one line: A margin requirement is the amount of collateral a broker makes you hold while a short option is open, recalculated as the stock and option prices move.
How it works
When you sell an option, your broker holds back money as a promise you can pay if things go wrong. That amount is the margin requirement.
For a cash-secured put, it's simple: the strike times 100, the full cost of the shares. Some brokers count the premium against it. The cash is the cover.
In a margin account, a short put can be held with less. A common starting formula for a short put on a stock, from exchange rules, is the larger of:
- 20% of the stock price, minus how far the put is out of the money, plus the put's current price. All times 100.
- 10% of the strike, plus the put's current price. All times 100.
Your broker can ask for more than this, and many do. Check your broker's current help pages.
The key part: the formula uses today's stock price and today's option price. When the stock falls, the requirement rises.
An example (hypothetical)
XYZ is at $50 (an illustration, not a trade idea). In a margin account, you sell a $45 put for $1.00.
- Day one: 20% × $50 = $10, minus $5 out of the money, plus $1 = $6. That's $600 held. (The other test, $4.50 + $1 = $5.50, is lower.)
Then XYZ slides.
| XYZ price | Put price | Requirement | Loss if you buy it back |
|---|---|---|---|
| $50 | $1.00 | $600 | $0 |
| $45 | $2.50 | $1,150 | −$150 |
| $40 | $5.50 | $1,350 | −$450 |
| $35 | $10.00 | $1,700 | −$900 |
The requirement nearly triples while the loss grows. Now say you sold five puts because $600 each looked small. At $35 you'd need $8,500 held, not $3,000.
If that money isn't in the account, it's a margin call. Your broker can close positions for you, near the low of the move. The −$900 per contract becomes real: −$4,500 on five. A math example, not a promise.
Why it matters for sellers
The margin requirement is not your risk. It's a down payment on it. The full risk on this put is still about $4,400 per contract if XYZ went to zero.
That's why the wheel strategy is usually run cash-secured. The cash for assignment is set aside from day one, so a falling stock can't trigger a margin call. Size every put as if you'll buy the shares. Our cash-secured put guide shows that sizing.
In Canada, TFSAs and RRSPs don't allow margin, so short puts there need the full cash, where the broker allows them at all.
Questions
Why did my margin requirement go up overnight?
The stock fell, the option rose, or both, and the formula uses today's prices. Brokers can also raise their own rates on a stock, often before earnings or in a fast market.
What is a margin call on a short put?
Your account no longer covers the requirement. The broker asks you to add cash or close trades, and it may close them for you without waiting.
Is a smaller requirement better?
It lets you sell more contracts with the same money. That's leverage, and it makes the same drop hurt more.
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