Writing Options Contracts

• When you buy an options contract, the most you can lose is the amount of money you paid for the contract. When you write a contract, however, you accept an obligation to buy or sell stock if the options buyer chooses to exercise her option. As a result, it is possible to lose more money than you have in your brokerage account. In order to protect brokers from the risk options writers can potentially expose them to, writing options contracts involves special margin requirements.
  
  

Options Margin

• Margin is a line of credit provided by your broker that allows you to buy stock using the money and investments inside your account as collateral. Margin, as it relates to writing options, is slightly different. Because writing a contract can potentially cause you to lose more money than you have in your account, the Chicago Board of Exchange (CBOE) requires that options writers keep a certain amount of money or securities in their accounts as collateral against potential future losses.
  
  

Determining Margin Requirements

• Margin requirements are quite complex and vary broadly between different types of options strategies that you may wish to use. CBOE has a margin calculator on its website that allows you to calculate the minimum amount of collateral you must keep in your trading account that factors in the price of the stock, the price of the contract and the type of options strategy you choose to use. Keep in mind, however, that your own broker may have stricter requirements than the minimums required by CBOE.
  
  

Covered and Uncovered Options

• You can write an options contract on stock you already own or on stock you do not own. When you write a contract on stock you own, it is referred to as a covered contract. Covered options entail much less risk. If the options buyer chooses to exercise his option, at worst, you will have to give him the stock you own at the price agreed upon in the contract. Writing options on stock you do not own can be much riskier because if the buyer exercises her contract, you will be required to buy or sell no matter what the current market price is. As a result, margin requirements are much stricter for uncovered contracts than they are for covered contracts.