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Margin- Introduction

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Margin

Introduction
Writers of naked puts and uncovered calls are considered to be short the stock because of the obligation of the option writer to purchase the underlying equity should the option holder exercise his or her rights. As a result, writers of naked puts and uncovered calls must maintain margin accounts in much the same way that any short seller does. Because of the potential need to purchase stock or close out positions, investors must have sufficient collateral in their accounts (in the form of capital and/or equities) to ensure that such obligations can be met. For writers of naked puts and uncovered calls, the collateral required is the greater of:


 or

The OTM amount in the first formula is the amount by which the option is out of the money. For puts this is defined as the amount by which the stock price exceeds the strike price. For calls this is defined as the amount by which the strike price exceeds the stock price. By regulation, this collateral must be maintained in …