Sunday, April 24, 2011
How to Calculate Margin Requirements
The formula is fairly straightforward, but does require a calculator. The formula requires 20% of the underlying market price + the premium - amount out of the money OR 10% of the underlying market price (or strike price for O-T-M puts) + the premium, whichever is greater.
STO - Sell To Open - 1 contract BTU $65 put expiry Jan 2013 for $11.20.
Let's take BTU as an example. BTU closed at $66.00. Plugging in the numbers for the formula to selling a Naked Put on BTU, we would take 20% of $66.00 = $13.20 + premium received $11.20 - amount out of the money $66.00 - $65.00 = $1.00=$23.40 - OR - 10% of underlying market price ($66.00 x 10%=$6.6+$11.20=$17.80), whichever is greater.
Applying the formula:
BTU $66.00
20% of $66.00=$13.20Plus premium received $11.20Less amount out of the money $1.00Margin Requirement: $23.40-OR-
BTU $66.00
10% of $66.00=$6.60Plus premium received $11.20Margin Requirement: $17.80The Margin Requirement is the GREATER of the two methods of calculation, therefore, in this case, Margin Requirement would be $23.40. Since options always represent 100 shares of the underlying, multiply $23.40 by 100 to arrive at $2340.00 in actual margin requirement.
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