How to Calculate Margin Requirements

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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=$13.20

Plus premium received $11.20

Less amount out of the money $1.00

Margin Requirement: $23.40

-OR-

BTU $66.00

10% of $66.00=$6.60

Plus premium received $11.20

Margin Requirement: $17.80

The 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.

Bullish on BTU

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BTU is climbing in price, to a current $65 +/-.  I feel bullish long term on this stock.  Therefore, I have placed a bullish position to expire in 2013 for a credit of $500.  The entire position consists of a Bull Call Spread and Selling a Naked Put.

Bull Call Spread

BTO 2x 2013 $65 call @ ($18.35)

STO 2x 2013 $70 call @ $15.86

 

DEBIT: ($2.49) x2=($4.98)

 

-and-

STO 1x 2013 $65 put = CREDIT $11.20

Margin Requirement for the Naked Put $2,468.00