 Hello to all my fellow option traders and investors out there. Lee Lowell here from smartoptionseller.com. How's everyone doing today? Hey listen, if you're a put option seller and you're interested in figuring out what's the margin requirement for selling put options or what is this margin requirement? What is it? I don't understand what it is. That's exactly what we're going to talk about today in our options information video. And after that we will look at some charts as we usually do as part of our Saturday synopsis. We'll take a look at some charts, see what the indexes are doing, see what happened over the last week. And we'll take a look and see what's going on for next week. So if you're interested in learning about the margin requirement, let's get started right now. As we do, we always pull up our cheat sheet and today's cheat sheet is all about what is the margin requirement for selling put options? As you know, at smartoptionseller we are big put option sellers. That is what we do, that is our bread and butter. So if you are a put option seller, this might be very interesting to you because a margin requirement is something that happens when you sell put options. So as a refresher, when you sell a put option contract, what you're doing is obligating yourself to potentially buy shares of stock at a much cheaper price than where the stock is currently trading. And that's what happens when you sell out of the money put options. If the stock's here, you can sell a put option contract down here and you're obligating yourself to potentially buy those shares of stock at that particular price. You can set the price, you can decide what price you wanna buy the stock for and you can sell the put option according to those levels and you get paid money upfront for that transaction. That's why we love selling put options because we get money and we get to choose a stock price, you know, of a quality stock, we get to choose a price where we potentially wanna buy that stock. So it's a great strategy and as you probably know, if you've been watching my YouTube videos, I make a lot of videos about selling put options. So you can go back and watch some of the prior videos. So let's talk about the margin requirement. When you sell a put option, obviously you're potentially going to buy a stock and have to pay for that stock in full at expiration if you are assigned on the put options. Now the only way you'll be able to buy the shares of stock, if the stock actually falls from its current price down to your strike price by expiration. If that doesn't happen, then you don't get to buy the shares of stock and that's fine, you just collect the premium and you walk away with your money intact. But if the stock does fall from its current price all the way down to your strike price, then you are on the hook to buy those shares of stock and at that time, you will have to pay for those shares of stock in full, full cash outlay. So let's take a look at this little cheat sheet that I've created here and we're gonna look at the margin requirement for selling put options. Let's just use a hypothetical example. There's $100 stock, that's the current stock price, $100. And you sell a three month $80 put option contract for 50 cents per contract. So what does that mean exactly? Well, while the stock's at 100, you've sold the $80 put option. So basically what you're saying is, okay, if the stock drops from 100 to 80, I'll be willing to step up and buy 100 shares of that stock at $80 per share. That's a $20 dip in the stock price. So you're thinking, okay, I'll buy these shares at a $20 discount from its current price. And at that time, if I get assigned, that's what the process is called, getting assigned the shares, I'll pay my $8,000 to buy 100 shares. Now just remember, every option contract consists of 100 shares of stock. So you have to know how much you're playing with. You're on the hook to buy 100 shares at $80 per share. So that would be an $8,000 outlay of cash if you were assigned at expiration. But here's the thing. This is how the margin requirement works. If you were trading these options in a margin account, your broker is not going to ask you or tell you that you have to put up the $8,000 upfront. You don't have to come up with $8,000 right off the bat because in reality, you haven't actually bought those shares of stock yet. So the way I see it, it's unfair for the broker to ask you to put up $8,000 for a stock that you haven't bought yet. So that's where the margin requirement comes in. Margin requirement is a fraction of that $8,000 that you have to keep aside in your account at all times at a minimum while the trade is active. It's sort of like good faith, money, a collateral that you have your full account of money in your account and you're gonna take a portion of that and hold it aside while the trade is active. So let's just say you have a $10,000 account and you're on the hook to buy 100 shares at $80 a share. That's $8,000. Well, you're not gonna have to put up, you're not gonna have to hold aside, I should say, $8,000 of your $10,000 while the trade is active. Your broker's only gonna require you to keep a fraction of that $8,000 on hold or aside that you can't use while the trade is on go. And that's what's called a margin requirement. And if you trade options in a margin account, you will have a margin requirement when you sell put options. And how much is that fraction then? Well, here, as I've written out, most brokers today typically ask you to hold aside 10% to 20% of that full-cost value. So in this case, that would be 10% to 20% of the $8,000 cost. And that comes out to either $800 to $1,600 of your $10,000 full-account value. That has to be held aside while the trade is on go. And so you have your $10,000 account. Your broker gives you the margin requirement of 10 to 20%. So $800 to $1,600 of your full capital is gonna be held aside. You can't use that money anymore while this trade is active. If you are trading options in a cash account or an IRA, your individual retirement account, you are not allowed to use margin. You can't have this margin requirement. So you actually have to come up or have to have the full $8,000 on hand on hold at all times if you're using a cash or an IRA account. To me, that's not really using your money efficiently because why hold aside $8,000 if you actually haven't bought the shares of stock yet? It's not the same thing. You don't control those 100 shares yet. So why would you have to hold aside $8,000 of your account for 100 shares that you may never end up buying? So to me, we like to sell put options in a margin account because then we get the margin requirement and it only takes a small fraction of our cash that we have that is held aside while the trade is active. So that's really what the margin requirement is. So when you actually sell a put option, you have what's called the initial margin requirement. So it's written right up here, you can read it here. So that initial 10 to 20% is what's called the initial margin requirement and that's what you have to hold aside right when you sell that put option that $800 to $1,600 is held aside immediately. Now while the trade progresses and the stock fluctuates up and down, the margin requirement also fluctuates. So you need to understand the margin requirement is not a static number. It does not stay the same number throughout the life of the trade. The margin requirement can move up and down just like the stock does. So your broker will continuously reassess the margin requirement as the trade is ongoing. And that's what's called the maintenance margin, right here, maintenance margin. So the maintenance margin is what your ongoing margin requirement is as the trade moves along towards expiration. So the one thing I wanna talk about is that, yes, when you sell put options, you're only using a fraction of the cash that you have in your account. So you think, this is great. I can sell all these put options and I only have to put up a small amount of money as the margin requirement. So that's good, but yet you have to be aware of how many put options you're selling, how many contracts you're selling, how many stocks you're selling put options on because you can get caught up and I'm gonna get all this money by selling put options. But you have to remember, you have a margin requirement. Your broker is requiring you to have some skin in the game, right? You have to have some skin in the game that means you have to have some of this money held aside. And what happens is, let's just say the stock does fall from $100 to $80. That means now you have to come up with a full $8,000. If you've sold all these other put options and all the stocks start dropping at the same time, your margin requirement is going to go up and your broker's gonna have to have you hold aside more and more money to potentially cover the purchase of all those shares of stock. So you don't wanna get yourself caught in a cash crunch where all of a sudden your $10,000 account value, now you need let's say $15,000 to $20,000 worth of margin requirement and you don't have that extra money. So what happens is, is that you can get what's called the margin call from your broker saying, hey buddy, you know, you've sold too many put options, your margin requirement's gone above your cash balance, this is a margin call. You need to deposit more cash into your account or we're going to start liquidating some of your other positions and you don't want that to happen. So be aware of how many contracts you've sold, what the margin requirement is and how much cash it'll take you if you have to actually buy all those shares of stock at the same time. Now remember during the coronavirus, all stocks fell all at the same time. So that could cause a assignment of all these shares of stock all at the same time and you may not have the cash at that time to buy all these shares of stock. So just be careful with how many contracts you sell and how much money you have in your account. So it's just, I want you to be aware of that. One other thing I wanna talk about, margin requirements, some people will get the margin requirement confused with what we call buying on margin. Some of you may have been buying on margin in your account. What that means is when you buy shares of stock, you can just either outright pay for those shares of stock on your own using the cash in your account or you can have your broker pay for half of those shares and you pay for the other half of the shares. If the broker is gonna pay for half of the shares, they're gonna give you a margin loan. They're gonna loan you money to buy 50% of the shares and when you have a loan, you have to pay interest. So when you buy on margin, you're actually taking out a loan from your broker and you're gonna have interest payments while you hold those shares of stock and when you sell those shares of stock, then your margin loan gets paid off and you're back to normal. When we sell put options, we are not borrowing money from the broker, we're not paying interest to anybody. The margin requirement is just used with cash that you already have in your account that's held aside while the trade is active. So you're not taking any kind of margin loan when you sell put options. All right, so let's take a look at how this actually works. I'm gonna bring up my interactive brokers, simulated trading platform and we're gonna see what happens when you sell a put option, how you can see what the margin requirement is in actual dollars and you'll be able to see what that is before you actually place the trade. So let's bring up our interactive brokers option chain here. Let's do this. So in interactive brokers, I've got some AMD advanced micro devices, put options listed here, I've got some, the quotes, bid-ask quotes here. When you sell a put option, you click on the bid price and that'll invoke a sell order ticket. It brings up another window. This is the sell order ticket and what we're gonna do here is you can see the sell button is already engaged for us. We're gonna sell the AMD December 18, 2020, 70 put and we're gonna sell that for, let's just say 77 cents per contract. We're gonna sell one contract. You can sell as many as you want. Let's just put in three here. And before you actually place the order, you click on the preview button and I've shown this in prior videos, click on the preview button and it's going to show you what happens before you actually place the trade. And here's the ticket. It's we're gonna sell three lots, three contracts of the AMD 70 put and try to receive 77 cents per contract. And down here on this side right here, it tells you how much you're about to receive. If you sell three contracts, if you get filled on this order, $231 will be deposited into your trading account and there's estimated commissions. And on this side is a little bit important because it'll tell you what the margin requirement is when you sell this trade. So actually let's do one contract to make it easier. Let me pull this back here and hit preview again. Okay, so we're gonna sell one contract. We're gonna get $77 and here's the margin requirement for selling one individual contract. This is telling you what your current account balance is before the trade and what the account balance is after the trade. You can see this number right here is $75. This is what you'll get after commissions to all that $75 if the trade goes through. Your account value will go up by $75 because you're collecting the money that the put option buyer is paying you. So your account value goes up by $75 and here is the margin requirements. This is very important to look at these numbers. The initial margin requirement is $776. Now if you think about it, when you sell this put option it's the $70 put. So that would mean you're contracting yourself out to buy 100 shares at $70 per share. So that would be a $7,000 outlay of cash if that trade comes to fruition at expiration. But until that time we have the margin requirement. In this case it's $776 for each contract sold. So that's a little over 10%. That's like a 11% margin requirement. Remember I told you on the prior screen the margin requirement is somewhere between 10% and 20%. In this case it's about 11%, $776. And so in this case I have another position in the account that I'm gonna show you. So my current margin requirement from this new trade plus the trade that I already have is $3,500. Add the new $776. Now after if I make this new trade along with the other trade I already have in my account now my margin requirement is $4,294. So out of my million dollars, this is fake money simulated account, out of the million dollars $4,294 has to be held aside while this trade is active. So my a million dollar account is gonna be decreased by $4,294 that I can play with. All right, so if I was gonna send this trade through I'd click override and transmit. I'm not gonna do this trade. So I just wanna make sure you understand if you trade with interactive brokers you can see this information right here is very important to understand. Okay, so let's take close this out and I'm gonna show you what the, I'm gonna show the account value. So when you're in an interactive brokers you can click on the account button right up here. This is gonna show you what you have in your account, what positions you have in your account, how much cash you have and what the margin requirement is. And I already have the account window pulled up here. So this is the account window. Now I told you I already had another position in here right down here at the portfolio. I have an SPY, a SPY December 18th, 2020 $320 put option that I've sold. This is a simulated account. This is not a real trade, it's just fake money. I've sold one contract of this $320 put option which if it came to fruition and I had to buy 100 shares of this 320 put that would be a $32,000 outlay of cash if the trade actually went through. And up here you can see all the information you need to know about what your funds are doing at that time. Now here's the current margin requirement. So I sold this 320 put and right now my margin requirement is $3,518. So that's a little bit more than 10%. That's what maybe 11 or 12% margin requirement for selling this SPY put option, right? It would be $32,000 to buy 100 shares but my margin requirement is $3,500. So that's what 11,12%, a little under 12% of the margin requirement. So in order for me to hold this trade I have to hold aside $3,518. And the maintenance margin is the same. The margin market is closed. Today is Saturday, November 14th, 2020. Market is closed right now. So right now I have $3,500 in margin requirement. So if you sell put options and interactive brokers or any broker you pull up your account and you can see how much cash you have and how much the margin requirement is. It's very important to understand. You don't want the margin requirement to be greater than your cash balance. Let's just say my margin requirement all of a sudden turned out to be $1.5 million. I'm a half a million dollar shy. I'd have to come up with an extra $500,000 from somewhere. I'd have to pull it in from another account or I'd have to start liquidating positions to make sure the margin requirement is not greater than the cash balance. That's when you get into a cash crunch. You do not want that to happen. So that's really how it works. When you sell put options you're gonna have this margin requirement which is less than the amount it would cost you to actually buy the shares in full. It's roughly 10 to 20% of your account of that full cost of the stock. So make sure you talk to your broker or ask your broker what's the margin requirement and you can always pull up that trade ticket right before you're about to enter the trade. It'll show you how your margin changes before the trade and after the trade. So be very careful how you trade put options. Selling options, okay? Selling call options is very risky. I'm not showing you how the margin works for selling call options. This is just for selling put options. We know the end game with selling put options is the stock can drop to zero. If you sell call options, unlimited risk to the upside. The stock can go up forever and you'd be out a lot of money. So we only sell put options. We don't sell naked call options. All right, so that's it. That is the lesson on how the margin requirement works for selling put options. Now let's go take a quick look at charts here. This is part of our Saturday synopsis. We look at the charts, see how things progressed over the last week, see where the markets went and we take a look at some individual stocks to see what's coming on for the week forward. Let's pull up our SPY. The SPY is Exchange Traded Fund for the S&P 500. This is a great instrument to see how the overall market is doing. If you've been watching my prior videos, you see that we always go over the markets. The index is first to see how the overall broad market has performed. We've been looking at the SPY. We've been looking at this W pattern, very bullish W pattern. We've talked about this. Here's our resistance line right here. Once the stock gets above the resistance line and stays above the resistance line, we will see more upside action. Now, as of last Saturday, I made this my last video last Sunday, Joe Biden here in the United States was declared the winner of the US presidential election. This has been the first full week of trading after it was declared he won. On Monday, you can see this big long line here. Let's open this up a little bit. So here was Monday this past week, popped above the resistance line. Everyone was enthused. Pfizer came out with the announcement that their coronavirus vaccine was 90% effective in the trials. So everyone was really happy about that. That information came out, I think before the market opened on Monday, and you see we just powered higher on Monday. And then we spent the rest of the week kind of that sell-off, that initial burst got sold back down. And we kind of meandered around. This week was a very tight trading range week. Small movements, once we came back down, the range was very tight. And Friday, yesterday, Friday the 13th, you can see the SPY just finished above the resistance line. If you see that little dash mark on the right side of the bar, each one of these bars is one day's worth of trading. It closed above the resistance line. So that's very important. Closing price is very important when you're analyzing charts. So it popped back above it. And so we have to see what happens next week. The coronavirus vaccines are, we're getting some, it's making some headway. Other companies are creating their vaccines as well. So on the horizon, six months from now, hopefully everyone around the world will have access to a vaccine. So the market is looking ahead, being optimistic, even though coronavirus cases around the world is still escalating, especially here in the United States, but we're hoping the vaccine is gonna be the thing that helps the overall case here. So the market is optimistic, closed above the resistance line. So that's the SP500. I'm hoping that it's just gonna go, it's going to keep going up over the next week. Let's take a look at the NASDAQ composite. NASDAQ composite. You can also see the W pattern as well. Here's the resistance line. On Monday, here's Mondays, this one day right here, popped right up to the resistance line, but got knocked back down. We had kind of a little bit of a larger range in the NASDAQ, but it ended the week on a hot, on a good note. It started coming back up. You can see it bounced right on the 20 day moving average here. It's this blue line, 20 day moving average, very important on the charts, 20 day and 50 day moving averages we use, bounced off the 20 day and ended the week on a good note. It actually went up higher. It didn't close as high as on Monday, but we actually saw some movement upwards, still above the moving averages, which is good. So I'm hoping that the NASDAQ could get its footing again and start to move above the resistance line. Let's take a look at the Dow Jones Industrial. We always look at all three indexes. Dow has had, I think the Dow has been the strongest over the last couple of weeks. We talked about this a few weeks ago. Here's how it bounced right off the 200 day moving averages. A great move for the Dow, bounced hard and kept bouncing. Finished the prior week last Friday above both moving averages. And here's how it opened up on Monday. Here's Monday this past week. Here's a nice gap move opened above the resistance line and all throughout the week. So trading mostly above the resistance line. So this is a great movement for the Dow Jones Industrial average. Couple of days already above the resistance line. We'd like to see at least three days worth of trading and closing above resistance or support levels. Whatever you're looking at on your charts. Here's our resistance line. We call it resistance because it's, the stock is trying to push above this area. That's why it's called resistance. And this week we got to push above the resistance. I like the movement and the Dow. I'm thinking we're in a very bullish seasonal period. I talked about this November through January. Very bullish seasonal period. And I think we're just gonna keep going higher. I am bullish and I think the market has more legs to run. So that's the indexes right there. Let's take a look at some individual stocks which is what we typically do. Let's take a look at Apple. These are just very popular stocks. We're going to look at Apple. Still kind of meandering around here. What I like is that it's still trading above both the 20 day and 50 day moving averages. They're right on top of each other. When moving averages are very intertwined and trading on top of each other. That means that the trading ranges have gotten tighter and tighter. Okay, so that means the stock's not really going anywhere. You can see Apple's going down, it's going up, it's going down a lot. So it's trading in this nice tight pattern still above both moving averages which is a good sign for you bulls out there. I'm hoping Apple could eventually regain its footing and start moving back up to its all time high that was right here. Let's take a look at Amazon. Amazon is struggling a little bit. It's trading below the 20 day and 50 day moving averages. They're both on top of each other as well. That means the trading ranges are small even though you can see some big movements. The averages are still tight. I don't like that. Amazon is trading below these moving averages but we've seen it here. It was below here, it popped back up. It was below it here, it popped back up. I think it's just a matter of time before these NASDAQ stocks become hot again and Amazon will start to go back up but it's got a little work to do. It's still trading below the moving averages. People have to feel good about buying Amazon again. A very expensive stock. So I'd like to see Amazon move up again. Good thing that this is a 200 day moving average still sloping upwards. It's important to see that the average is sloping upwards. So what else do we have? Google, Google has been very, very strong a long time ago. We talked about how it bounced off the 200 day moving average and it's just been going higher since. So Google is a very strong stock looking good. I don't see Google having any trouble in the future. Tesla we look at. Tesla, we had drawn this triangle pattern the last couple of weeks. So the movements in Tesla is getting tighter and tighter and tighter and eventually it's gonna pop out above or below. Which way we don't know yet. It's gonna take some news items to get it out of its range. So watch this triangle pattern over the next week or two see which way the stock starts to go. Microsoft, another of these big players. Microsoft's just kind of in the meandering around sort of see the W pattern right here. You can almost draw, let's move this over. You can almost draw resistance line here as well if you want on Microsoft. Let's do that. So keep an eye at Microsoft over the near term for future. You can see this W pattern. If it gets above that's about $233 or so. Microsoft will probably kick up in the future. What else we have? So some of these stay-at-home stocks like Zoom, Zoom video was a darling and then it's just been selling off, selling off, selling off. It's taken a pretty decent hit. You know, if the vaccine comes through and the economy gets going again, people may not be working from home as much anymore. So Zoom won't be getting as much action. That's the thinking that's going on out there. So Zoom's been getting hit. What other Peloton is the at-home exercise? Bicycles was a darling as well. It's getting hit too. People might not be spending as much time at home anymore. They may end up going back to the gym. So Peloton's getting hit a little bit. Docu, the online document program, kind of meandering around. This is one of the people like Docu and Teladoc, T-Doc is this online medicine player. It's kind of gotten hit as well. So these are some of the, these high-flying stocks that people like to play during the pandemic. I'm not a big fan of these. I just, I kind of stay away. I look, I try to stick with the indexes. So let's just take one more look moving forward. SPY, market looks good. I like the W pattern. We're just watching this resistance level right here. If the broad market could continue on next week, staying above the resistance line, then that just gives the bulls more ammunition to keep going. So I like the market going higher from here. And lastly, we take a look at the VIX, the volatility indicator. Yep, VIX has been moving down as the market had been either meandering sideways or moving up. The VIX moves inversely to the general market. So the VIX has come down and just kind of meandered around this week, just like the stock market did as well. So volatility's getting cheaper, not as cheap as it was, but people aren't as nervous as they were. Volatility also measures fear in the market and people aren't as fearful anymore as they were prior. This was back in February, March when the coronavirus really hit. So volatility's come down. It has effect on option prices. Option prices are cheaper now than they were. So that's good for you option buyers out there. All right, so that's it for the market assessment. Let's take a look. We go back to our website. Just remember, on our website, you can always download our free put selling basics guide. You can click the link right here or you can just fill out the information, name and email address. You'll get a free copy of our put selling basis all about how to sell put options. And I also talk about the margin requirement in the report as well. Don't forget our services tab, our newsletters, smart option seller. We sell naked put options, vertical spread trader. We sell put option credit spreads. Some people like that. We've got people who subscribe to both and our one-on-one coaching. We're doing real well. We've got a lot of students coming to us. They just want to get over the hump. They just want a little help to help them figure out how to trade options. So if you're a newcomer and you want a little bit of help, consider our one-on-one coaching. Okay, that's all for today, Saturday, November 14th, 2020. I hope everyone has a great weekend and a great week ahead. This is Lee Lowell signing off.