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E-mailOur resident options experts, James Cordier and Michael Gross, answer readers’ questions.
Q: A friend told me that in selling futures options, I could get margin calls. Is this true?
A. One of the biggest fears new commodity option sellers express is the fear of margin calls. Will I have to send more money? Will they take my car? My house?
Relax. It is true: you can get a margin call when selling futures options. However, this statement comes with two important caveats:
1. If you are positioning correctly, you should never get a margin call.
2. Novices tend to misunderstand what a margin call really means (hint: It does not mean you have to send more money).
A margin call is a safety device employed by the exchanges. When you sell an option, the exchanges require that you post a deposit to hold that position. As we have discussed in previous columns, this is called a margin deposit and it comes out of your account funds. When the trade is closed, you get your margin back (that’s not exactly how it works, but for the purposes of this example, we have simplified it). The margin deposits, however...
Excerpted from an article originally published in the Nov/Dec 09 issue of YourTradingEdge magazine. All rights reserved. © Copyright 2009, MarketSource International Pty Ltd.
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