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Margin Definitions - Not The Same For Options As For Stocks

Most stock traders know all about margin. You can buy stock and pay 50%, borrowing the other 50% on margin. This is great leverage as long as the price rises, but a much bigger risk if the stock price falls.

But when it comes to options trading, "margin" has a completely different meaning.

Unlike the stock margin, meaning leveraged trading, in the options world margin is a collateral requirements. Depending on the kind of trade, you are required to post collateral requires by the margin rules. The most extreme example is that of an uncovered short option. The margin requirement here is for 100% of the strike value. For example, if you sell, a 50 strike option, you have to provide $5,000 collateral in your margin account.

Using the same word for two vastly different kinds of requirements is very confusing. To find out how much margin collateral you need for specific trades, download the free and very valuable CBOE document, the CBOE Margin Manual

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