Margin Required And Your Profit

Options strategies give you a huge benefit in terms of leverage and margin.

When you buy stocks, you either pay with 100% cash or you pay 50% in a margin account and the broker lends you the other 50%.

Your return is based in how much you made, divided by how much you invested, the capital required or margin required.

With the strategy you will learn here, the margin required is so low that it makes the yield on the premium collected very high.

Regarding selling naked Put options, the margin requirement has changed dramatically over the years.

I’m going to give you the formula you can use to figure out how much you need to invest to make the premium income you want.

When you open an online account, they will have a “margin requirement” for each strategy.

This “margin requirement” is the amount of cash you need to make this trade involving Selling “Naked” Puts.

How To Calculate Margin Required:

This is the base calculation to figure out the margin required to do the trade.

20% of the underlying stock’s price + premium – out-of-the money amount x 100 = margin required.

OK, let’s break it down…

We take the stock price and only have to put down 20% of that price.

Then we add the amount of premium we want to collect.

Then subtract the amount out of the money of your strike price.

Multiply that times 100 and that number is your margin required to do the trade.

This is a critical number because you cannot figure out how much you can make until you know the margin required to do the trade.

Now let’s apply that formula to some examples…

Let’s say CAT is at $95 per share.

You can sell the CAT $88 Put for .72

To calculate the margin required…

Stock Price of $95 x 20% = $19 + premium .72 = $19.72
– OTM of $7.00 (because our strike price is 88) = $12.72

12.72 X 100 = $1272 Margin required.

1 option contact margin requirement = $1272

If you want to trade 10 option contracts, it would be
$1272 X 10 contracts = $12,720 margin required.

How To Calculate Your Profit:

To calculate your return, take the premium you collected times 100 because each option contract is equal to 100 shares of stock.

In this case, we sold the Puts for .72

To calculate our profit we take .72 X 100 = $72

$72 divided by $1272 = 5.6%

10 contracts cost 12,720 in margin you collect an instant premium of $720. $720/$12,720 = 5.6% yield.

If you did that every month, your annual yield would be 67%.

If you did it just 10 times a year, your yield would be 56%.

Now let’s look at a few more examples.

AMZN Example…

AMZN is at $760 per share.

You sell AMZN 740 Put for $9.60.

Stock price 760 X .20 = 152 + 9.60 premium = $161.6 – $20 amount strike price is out of the money = 141.6

141.6 X 100 = $14,160

We invest $14,160 in margin to make this trade.

Sell 1 AMZN 740 Put for $9.60 =

Collect $960.00 instant premium income.

$960 income is a 6.7% return on this trade.

Netflix example...

NFLX stock is at 123 per share.

You Sell 10 Jan NFLX 114 Put for $1.25

$123 X .20 = $24.60 + 1.25 – 9 = 16.85 X 100 = $1685 margin required.

X 10 options contracts = $16,850 required

$1.25 X 100 = $125 X 10 = $1,250 premium income.

$1,250 / $16,850 = 7.4% yield

It's important that you know the formula. But this calculator at the top of this page makes it all very easy and much faster to analyze possible trades.