InvestorQ : Why do I have to pay margins when selling options?
Niraj Mehta made post

Why do I have to pay margins when selling options?

Answer
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Niraja Mehta answered.
2 years ago


Selling options has risk similar to buying and selling futures. Since downsides are unlimited, the daily margining and the MTM and SPAN are similar to futures. Buying an option is more straightforward. You pay the option premium and after that you are not really worried even if the price moves against you as your maximum loss is locked in. However, selling options is a different ball game altogether. When initiating an option sell position you have to pay initial margins like an open futures position. Additionally, there are volatility margins to be paid when the market risk goes up. Finally, there is the MTM (Mark to market) margin that you need to pay when the price movement goes against you. You need to be adequately capitalized to pay these margins and also factor the cost of funds into your option returns calculations. Selling options is not rocket science. However, it is essential to be conscious of the risks entailed. That should be a good starting point for selling options!