Option Contract Margin Requirements

 

Investors who purchase option contracts must meet the margin requirements for the position promptly. The investor’s margin requirement for the position varies with the type of option position established by the investor. Traditional options have no loan value and investors are required to deposit 100% of the option’s premium under Regulation T on T+3 or two business days after settlement. Because option contracts settle the next business day, most brokerage firms require that the investor deposit the required funds by T+1. An investor may purchases a LEAP with an expiration exceeding nine months by depositing 75% of the option’s premium in a margin account.

Margin Requirements When Exercising a Call

When an investor exercises a call, the underlying stock transaction will settle regular way on T+3. For settlement and payment dates, the exercise date is considered the trade date. If an investor exercises a call in a cash account, the investor must deposit the entire exercise value of the contract by the payment date. If an investor exercises a call option in a margin account, the required Reg. T deposit must be met by the payment date. An exception to these deposit requirements would be if an investor exercises a call and sells the stock on the same day. This would result in a cashless exercise and would not require additional funds to be deposited.

Margin Requirements When Exercising a Put

When an investor exercises a put, the underlying stock transaction will settle regular way on T+3. If an investor exercises a put in a cash account, the investor must be long the stock in the account or must deposit the stock by settlement date. If an investor is not long the underlying stock and exercises a put option in a margin account, the required Reg. T deposit must be met by the payment date to hold the established short position.

Margin Requirements When Writing a Call

When an investor writes a call, the investor’s margin requirement will depend greatly on whether or not the short call is covered. For margin purposes a call is considered covered if the investor is long:

  • The underlying stock
  • Securities convertible into the underlying stock
  • A call option with a lower exercise price and equal or longer expiration
  • A warrant with an exercise price lower than the option’s exercise price
  • An escrow receipt from a bank or trust company showing the stock is on deposit and will be delivered in the case of an assignment.

If the short call is covered by any of the above positions, the option is considered covered and no additional margin deposits will be required. If the investor is long a warrant with an exercise price that exceeds the exercise price of the call, the investor will be required to deposit the difference in the exercise prices in cash to hold the position. If an investor

establishes a covered call position with the underlying stock on the same day, the amount of the required deposit is reduced by the option’s premium.

Example:

An investor establishes the following position in a cash account:

Buy 100 TRY @ 49

Sell 1 TRY Nov 50 call @ 3

The required cash deposit to hold 100 shares of TRY is reduced by the option’s premium of $300 from $4,900 to $4,600. Alternatively, if the same position was established in a margin account, the Reg. T required deposit would also be reduced by the option’s premium of $300. The Reg. T required deposit to hold the position would be reduced from $2,450 to $2,150.

If an investor writes uncovered options, the transaction must be executed in a margin account. The required margin deposit will be subject to the premium received plus a percentage of underlying stock price.

Margin Requirements When Writing a Put

The margin requirement for a short put position will depend on whether or not the short position is covered. A short put is considered covered if the investor has:

  • Cash on deposit in an amount equal to the aggregate exercise price
  • A letter from a bank stating that an amount equal to the aggregate exercise price is on deposit
  • Established a short position in the underlying security
  • A long put with a higher exercise price and equal or longer expiration

 

Since all short positions must be executed in a margin account, a short put position covered by short stock must also be established in a margin account. Short puts covered by a cash deposit or an escrow receipt may be sold in a cash account. If the short put position is uncovered, the margin requirement will be subject to the premium plus a percentage of the underlying stock price. If an investor who is short uncovered puts in a margin account is assigned, the investor may meet the margin requirement by making the required Reg. T deposit of 50% or by depositing securities with a loan value equal to

50% of the securities market value.

 

 

DUTIES OF THE ROSFP

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