Margin Requirement

TL;DR: Margin requirements determine how much capital your broker locks up as collateral for options trades, directly affecting how many positions you can hold.

When you sell options, your broker requires you to set aside capital to cover potential losses. The amount depends on the strategy. Defined-risk strategies like iron condors and vertical spreads only require margin equal to the maximum loss (strike width minus credit received), because your risk is capped. Undefined-risk strategies like naked calls or naked puts require substantially more margin — typically 20% of the underlying stock price, plus the premium received, minus any out-of-the-money amount. A cash-secured put requires the full strike price in cash, making it the most capital-intensive per contract.

Most retail traders operate under Regulation T (Reg T) margin rules, which use a standardized formula for each strategy type. Portfolio margin, available to accounts over $125,000 at most brokers, uses a risk-based model that evaluates your entire portfolio together. Portfolio margin can dramatically reduce requirements — sometimes by 50-70% — especially for hedged or diversified positions, because it recognizes that offsetting positions reduce net risk.

Understanding margin is critical for position sizing. Your margin requirement determines your buying power utilization: using more than 50% of available margin leaves you vulnerable to margin calls during market volatility. A margin call forces you to close positions at potentially the worst time, locking in losses. Always calculate your margin requirement before entering a trade, and keep sufficient buffer for adverse moves.