MARGIN REQUIREMENTS
As in the case of futures contracts, the performance of contracts is also assured by the options exchanges (the OCC) the buyer of an option enjoys the right of its performance exchange, the exchange has, in turn, to make sure that the contract will be honoured. Thus, for example, if I write a naked call, my broker would need a guarantee in some form that I would have the necessary funds to be able to deliver the asset, should the buyer of the option choose to exercise the call, and in turn assure the exchange of the performance of the contract. For this, margin requirements exist as a form of collateral to ensure that the writer of a naked call can fulfill the terms of the contract.
Accordingly, the writers of options are required to meet the margin requirements. The requirements vary depending upon the brokerage firm, the price of the underlying asset, the price of the option, and whether the option is a call or a put. As a general rule, initial margins are at least 30% of the stock price when the option is written, plus the intrinsic value of the option. The amount of margin has an influence on the degree of financial leverage that the investor has and, consequently, on the returns and risk on the position.
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