Overview
Margin accounts support 3 types of options trading strategies:
-
Long Call Options give you the right (but not the obligation) to buy a stock at a particular price (the strike price) on or before a particular date (the expiry date). They're useful if you think a stock is going to increase in price.
Long Calls have a margin requirement of 100% of the options premium at the time of purchase. -
Long Put Options give you the right (but not the obligation) to sell a stock at a strike price on or before the expiry date. They're useful if you think a stock is going to decrease in price.
Long Puts have a margin requirement of 100% of the options premium at the time of purchase. -
As a Covered Call seller, you have an obligation to sell a stock at a particular price on or before the expiry date. You'll collect a premium for the options you sell in return.
There is no additional margin requirement to enter into a covered call. However, the margin requirement on the covered call strategy is calculated daily as the lesser of:- the margin requirement on the underlying security or,
- the margin requirement using the exercise value on the underlying security.
Covered call and margin example
Let's say you deposit $3,000 in your margin account. You buy 100 shares of XYZ at $100/share with a margin requirement of 30%. To purchase the security, you've used $3,000 of your own money and borrowed $7,000 from the brokerage (your margin used).
Now that you have 100 shares, you're eligible to write a covered call option. You decide to enter into a contract at a strike price of $120 with a premium of $2/share. The premium you receive is added to your margin available balance and your new margin balances are:
- Margin available: $200
- Max buying power: $667
- Margin used: $6,800
- Margin requirement: $3,000
If the security rises to $110/share, your margin balances are:
- Margin available: $900
- Max buying power: $3,000
- Margin used: $6,800
- Margin requirement: $3,300
If the market price of the security rises to $130/share and is above the strike price, the margin requirement is calculated on the exercise value of the underlying security. Your new margin balances are:
- Margin available: $1,600
- Max buying power: $5,333
- Margin used: $6,800
- Margin requirement: $3,600
At the expiration of the option, if the stock price rises to $130/share, surpassing the strike price, and the option buyer exercises the option, you are obligated to sell your securities at the strike price of $120/share. You receive cash from the sale and you get to keep the premium previously earned. Your corresponding margin balances are:
- Margin available: $5,200
- Max buying power: $17,333
- Margin used: $0
- Margin Requirement: $0
If, at the expiration of the option, the stock price stays below the strike price of $120/share, your option expires worthless. You keep the $200 premium and any appreciation on your shares. For example, if the share price falls to $110/share your new margin balances are:
- Margin available: $900
- Max buying power: $3,000
- Margin used: $6,800
- Margin requirement: $3,300
Auto-sell
Margin accounts are automatically enrolled in our auto-sell feature. This means if your option is "in-the-money" on the expiry date and you haven't sold it, we will automatically attempt to sell it for you. Auto-sell helps you realize the value of in-the-money positions even when you aren't monitoring the market.
Exercise
When reviewing your account to ensure you have sufficient funds to exercise your options, don't forget to consider your account's concentration limits. Learn more about concentration limits at Wealthsimple.
Long call and margin example
Similar to the example above, you deposit $3,000 in your margin account, but this time you decide to buy a call option on XYZ stock with a $100 strike price and a $2 premium. The total cost of the option is $200. Your margin balances are:
- Margin available: $2,800
- Max buying power: $9,333
- Margin used: $0
- Margin requirement: $0
As the expiration date approaches, XYZ stock rises to $120 per share. You decide to exercise your option, requiring a total of $10,000 to purchase 100 shares at the strike price ($100) plus any costs related to the exercise fee. The margin requirement on XYZ is 30%; therefore, in order to exercise your option, you need a minimum margin available balance of $3,000 in your account to get $10,000 in Max Buying Power and exercise your option. Per above, you currently only have $2800, so you deposit an additional $200. Your new margin balances are:
- Margin available: $3,000
- Max buying power: $10,000
- Margin used: $0
- Margin requirement: $0
Now that you have the necessary margin requirement and buying power in your account, you exercise the option, effectively buying XYZ at $100/share. Your new margin balances are:
- Margin available: $1,400
- Max buying power: $4,666
- Margin used: $7,000
- Margin requirement: $3,600
In this scenario, you've realized a profit of $1,800 from the stock appreciation ($2,000 gain minus $200 option premium). If the stock price had remained below $100 at expiration, you would likely not exercise, losing the $200 premium.
Long put and margin example
If we continue with the above example, you currently have 100 shares of XYZ at a market price of $120/share. You are now concerned the stock is going to decrease in value, so you enter into a long put option at an exercise price of $120/share at a premium of $2.00 share. Your margin balances are:
- Margin available: $1,200
- Max buying power: $4,000
- Margin used: $7,200
- Margin requirement: $3,600
As the expiration date approaches, XYZ stock falls to $100 per share. You decide to exercise your put option, which gives you the right to sell 100 shares at $120 per share. You receive cash less the exercise fee charged by your brokerage. Your new margin balances are:
- Margin available: $4,800
- Max buying power: $16,000
- Margin used: $0
- Margin requirement: $0
In this long put option scenario, you've realized a profit of $1,800 from the stock depreciation ($2,000 gain from the put option minus $200 option premium). If the stock price had remained above $100 at expiration, you would likely not exercise, losing the $200 premium.
Learn more about the Wealthsimple margin account
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