Many beginning put sellers aren’t sure about the size account they’ll need for selling put options. It’s a legitimate concern, given the leverage used in put selling. However, we have to consider that there are two account types: cash and margin.
Cash accounts don’t use any margin. These accounts must put up the full capital for any put options sold. This is called cash-secured puts.
For a $200 strike, that can mean $20,000. In that case, $25,000 is probably a good number at a minimum for a cash account. This will allow trading two $100 strikes or one $200 strike with some wiggle room. That may not seem like too many contracts.
For many who are trading cash-secured puts, they are often doing it in a retirement account. Retirement accounts are often larger than individual brokerage accounts, allowing them to trade more contracts.
Next is the margin account. This account is traded from an individual brokerage account (i.e., a non-retirement account). To get margin on put selling requires approval from the broker. Often naked puts require level four options approval.
Margin accounts don’t have to put up the full amount of capital for each trade. Instead, they only put up a percentage. For the same $200 strike, depending on the underlying, the amount of margin might be 20%. A 20% margin requirement on $20,000 is only $2,000. In all of our SOI subscriptions, most options only require 20-30% margin.
Because margin accounts don’t have to put up as much capital as cash accounts, they can hold more positions with a smaller account size. For example, a $10,000 account might hold 3-4 contracts with a $2,000 margin requirement each. With four contracts, that’s a total of $8,000, providing $2,000 of wiggle room.
Although margin accounts allow for more contracts, keeping a high cash level to soak up volatility is important. As volatility increases, it’s best to take down exposure (i.e., reduce the number of contracts) in a margin account. Otherwise, margin traders may find themselves in a margin call.
Many factors go into volatility. One $10,000 account with four $2,000 margin requirement contracts might be far less volatile than another account with the same capital but higher volatile positions. The less volatile account might stay with its four contracts anticipating continued lower volatility in their positions. Of course, that is still a risk.
If you are ready to explore the world of put option selling, SOI Basic is a 12-month program that teaches you how to sell put options. If you’d like to learn more, just click here.