In this article:
Overview
Margin accounts support four types of options trading strategies:
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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.
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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's 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.
- There's 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:
- A Secured Put is an options strategy where you sell/write a put option to collect an upfront premium. In exchange for this premium, you're obligated to buy shares of the underlying stock at the strike price if the option is assigned to you before or on the expiry date.
- If the put option is assigned, you must buy 100 shares of the underlying stock at the strike price (per contract), regardless of the current market price. This means if the stock price drops below your strike price, you'll be buying shares at a higher price than their current market value.
- You need to have 100% of the potential purchase cost available in your account as buying power. This ensures you can fulfill your obligation if assigned.
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Uncovered Short Options are an advanced strategy where you sell a call or put option without holding the full collateral to cover a potential assignment. This is only available to clients who have been approved for our highest level of options trading.
- The margin requirement for an uncovered short option isn't a fixed amount. It's calculated using a dynamic, risk-based model that considers factors like the stock's price and the option's market value. This means the amount of buying power held as collateral can change while the position is open, which could trigger a margin call.
- Assignment of an uncovered short put: If assigned, you're obligated to buy 100 shares of the stock at the strike price. Your account's buying power is used to complete this purchase.
- Assignment of an uncovered short call: Because Wealthsimple doesn't support shorting stocks, we'll automatically buy to close any uncovered short call positions that are in-the-money before they can be assigned at expiration.
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're 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
Secured put and margin example
Let's say you sell 1 put option contract for $3.50 with a $100 strike price expiring on a future date. You'll receive a premium of $350.
Margin requirement calculation: 1 contract × 100 shares × $100 strike price = $10,000
The buying power required is offset by the premium received.
Buying power required: $10,000 - $350 = $9,650
This $9,650 must be available in your account to secure the put and keep the position open.
Uncovered short option and margin example
Let's say you sell an uncovered put on XYZ stock with a $100 strike price and receive a $3.00 premium ($300 per contract).
Unlike a secured put where the full $10,000 potential obligation is held, the margin requirement for an uncovered option is calculated using a dynamic formula. This formula considers several factors, including:
- The underlying stock's price
- The option's own market value
- How far the option is from the strike price (out-of-the-money amount)
- The stock's margin requirement (e.g. 30%)
For example, if XYZ stock is trading at $102 when you place the trade, the buying power held as collateral would be calculated based on these live factors. Using the formula, the requirement would be approximately $3,160. This amount from your buying power would be held as collateral for as long as the position is open.
Important note: The collateral requirement is dynamic.
A key difference with uncovered options is that the amount of buying power held as collateral will change as market conditions change. If the stock price moves against your position, your margin requirement will increase. This can happen at any time while the position is open and could trigger a margin call.
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 $2,800, 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'd 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're 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'd likely not exercise, losing the $200 premium.
Uncovered short put and margin example
Let's say you deposit $5,000 in your margin account. You decide to sell an uncovered put on XYZ stock with a $100 strike price and receive a $3.00 premium ($300 per contract).
Unlike a secured put where the full $10,000 potential obligation is held, the margin requirement for an uncovered option is dynamic. For this example, let's assume XYZ stock is trading at $102, and the dynamic formula requires approximately $3,160 in collateral. The $300 premium is added to your cash, and your margin balances are:
- Margin available: $2,140
- Max buying power: $7,133
- Margin used: $0
- Margin requirement: $3,160
As the expiration date approaches, XYZ stock falls to $95 per share. Because the stock price moved against you, the dynamic margin requirement increases to keep the position open (e.g. to $4,000). Your new margin balances are:
- Margin available: $1,300
- Max buying power: $4,333
- Margin used: $0
- Margin requirement: $4,000
At expiration, because the stock is below the $100 strike price, your put option is assigned. You’re obligated to buy 100 shares at $100 per share, requiring a total of $10,000. You use your $5,300 cash and borrow the remaining $4,700 from the brokerage. Now that you own the stock, standard stock margin requirements apply (e.g. 30%, or $2,850). Your new margin balances are:
- Margin available: $1,950
- Max buying power: $6,500
- Margin used: $4,700
- Margin requirement: $2,850
In this scenario, you now own 100 shares of XYZ stock and have a margin loan, but you get to keep the initial $300 premium.
Uncovered short call and margin example
Let's say you deposit $5,000 in your margin account and decide to sell an uncovered call on XYZ stock with a $100 strike price, receiving a $3.00 premium ($300 per contract). Assuming a similar dynamic margin requirement of $3,160, your margin balances are:
- Margin available: $2,140
- Max buying power: $7,133
- Margin used: $0
- Margin requirement: $3,160
As the expiration date approaches, XYZ stock rises to $105 per share. The option is now "in-the-money."
If an uncovered short call is assigned, you're obligated to sell 100 shares of the underlying stock. Because Wealthsimple doesn't currently support short-selling shares, you can't be assigned on an uncovered short call. To prevent this, we'll automatically attempt to buy to close any in-the-money uncovered short call positions starting at 3:15 PM ET on the expiry date.
At 3:15 PM ET, our system automatically buys back the contract at the current market price of $5.00 ($500) to close your position. Because the position is now closed, the margin requirement is released. Your new margin balances are:
- Margin available: $4,800
- Max buying power: $16,000
- Margin used: $0
- Margin requirement: $0
In this scenario, you realized a loss of $200 (the $500 it cost to buy the option back, minus the initial $300 premium you collected).
Learn more about the Wealthsimple margin account
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