37.6 Lessons learnt
- Margin is an essential element when using options. When you sell options, you are required to hold margin, depending on whether you buy or sell calls and or puts you will be required to hold more or less margin.
- Margin can be used to determine how much yield you are obtaining. For example, when you sell put options, you receive a premium. If the received premium is 200u20ac and you are required to hold a margin of 2000u20ac, then we can use this margin to calculate how much yield you are making on your margin, in this case, 10%.
- It is crucial to take into consideration that margin requirements increase when the market is moving against the direction which is beneficial for the option you have sold. So if you have sold a put option and the market goes down, your margin requirement on the sold put option will go up. Same for the contrary situation, if you hold sold call options and markets rise, your margin requirement on these positions will increase.
- Even though the margin is leading, you always have to keep in mind the total exposure of your trades.
- Margin requirements can change for several reasons during the lifetime of your options, so margin trading requires strict rules and sometimes active management.
How to lower margin:
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- Never forget the total exposure and risk of your positions! Ten sold put options with a strike price of 600 have total exposure of 600.000 euros! n
- Reducing the number of sold options (for example, from 10 to 5) will halve your margin requirement. n
- Buying an option can reduce the exposure and the margin calculated. n