Adjusting Margin and Risk: Tips and Tricks to Reduce Margin Requirements and Alleviate Margin Calls (FT Press Delivers Insights for the Agile Investor) by Carley Garner

Author:Carley Garner [Garner, Carley]
Language: eng
Format: epub, mobi
Publisher: Pearson Education
Published: 2010-06-11T23:00:00+00:00

Naturally, there are no “free lunches”; the exchanges typically incorporate the cash collected for a short option into the option margin. That said, for those who are trading short options around a primary position, or as a component of a more complex strategy, the ability to use collected cash as margin is key. As we cover a few margin adjustment examples in detail, this point will become more clear.

Using a Long Option to Decrease the Margin of a Futures Position

A long option can be looked at as an insurance policy that pays out should a particular event happen within a particular time frame. Car insurance premiums are paid six months in advance, and a claim is paid only if an accident occurs within the coverage period and involves damage above and beyond a known deductible. If no such claim is made against the policy, the insurer keeps the money and the policy of the insured expires worthless. Similarly, an option can be purchased to insure a futures trader that the risk of his position will be limited to a degree based on the “type” of insurance (option) purchased.

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