Definition
Margin is the collateral a brokerage requires a trader to hold against positions that create obligations or use borrowed money. In options trading it applies chiefly to writers of contracts and to certain spread strategies — positions whose potential loss is not fully prepaid.
The margin requirement is the amount of capital the account must set aside. It is the broker's protection against a trader being unable to meet the obligations a position can generate.
Why it matters
How it works
When a trader buys a call or put, no margin is needed: the premium paid is the entire risk. But when a trader writes an option, the position can lose far more than any premium received, so the broker holds margin to cover that exposure. The amount is calculated from the underlying price, the strike, and the option's value, and it is recalculated as the market moves.
If a position moves against the trader and the account's collateral falls below the required level, the broker issues a margin call — a demand to deposit more funds or reduce positions. Failure to respond lets the broker close positions involuntarily. Defined-risk multi-leg strategies often require far less margin than uncovered short options, because their maximum loss is structurally capped.