Brokerage Accounts and Options Trading
As an example consider selling a put with a 25 strike price. Assuming the stock is more than 10% away from the money your margin at many brokers will be $250 or 10% of the strike price. Compare that to putting up $2500 in a cash or retirement account for the same trade. Clearly the margin account is the better way to go.
I am loosely including all types of retirement accounts in this category. The account could be an IRA, Roth IRA, Rollover IRA, 401K or other retirement accounts. Usually the brokers are more strict with option margin requirements simply because of their legal liability. Usually you can only sell an option on a cash basis or as a covered call. Often you cannot even do an option spread at some brokers. In most cases the retirement accounts will be treated as a cash account.
Portfolio MarginIn the discussion on margin accounts above I used an example based on Reg T margin. However there is another type of margin called portfolio margin we you often can choose. The exact computation is a little tricky and is something not all brokers have chosen to offer. The computation is based on the volatility of your portfolio and takes into account how diversified your portfolio is. It will often reduce your margin requirements if you maintain a diversified portfolio with a significant number of positions. However, it is only available to margin accounts. OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits.
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