 Hey everyone, welcome to another video lesson from navigationtrading.com. In this lesson, I wanna discuss the difference between margin and buying power, specifically as it relates to trading options. Now you may have heard the term margin used in a different capacity, such as being able to buy stocks on margin or sell stocks on margin. That's not what we're talking about here. In this specific case, margin refers to simply as the amount of capital required in your account to trade a specific strategy or position. And so what we're looking at today is we've got a chart of SPX and this is the risk profile graph for an iron condor. And you'll see on thinkorswim right down here in the bottom right-hand corner, it says margin required. And so what you're gonna see is it says $3,000. Now, what you'll notice if we hover over either these flat lines on either side, and you look at this teal number here, you'll see that the max risk on this trade is $1,890. This is a defined risk trade. And so the question is, if our max risk is $1,890, why does it display the margin requirement as $3,000? Well, here's why is because remember, when we are net sellers of options, in this case, we're selling an iron condor to open the trade, we are actually collecting a credit for that trading strategy, okay? And if you look down here, you'll see the credit that we're collecting is $11,10. Or in options speak, you gotta multiply that times 100. So the net credit is $1,110. That's also noted here, if you hover over anywhere around the max profit and you look at the teal number in the bottom left hand box, you'll see that's 1,110 right here. And so what you've got to do to figure out the difference between the margin required and the actual buying power required is take the margin minus the credit received, okay? So when you look at the margin, the margin is $3,000. Subtract the credit received, which is $11,10. And that gives you $18,90. So if you look at your max risk, $18,90, and on a defined risk spread like this, that is also the amount of buying capital required in your account to place this trade is $1,890. So it's just the margin required minus the credit received on the trade. Now, this is a defined risk strategy and so that's pretty easy to figure, but what if you're trading an undefined risk strategy like a short straddle or a short strangle? Well, let's take a look at another example. This one is in IWM, the Russell 2000. And so what we're looking at here, this is an example of a short strangle, right? We have undefined risk on each side. So how does the broker determine what your margin requirement is? Well, based on where the price is today, they are saying that the margin required in this case is about $1,600 on this trade. Now the market's open, so you're gonna see that fluctuate a little bit, but keep in mind when it comes to an undefined risk trade, that margin requirement can change throughout the life of the trade. So if I click and drag this vertical line, look at what the margin requirement does. If you were to start to lose money, you're gonna see that margin requirement is gonna start to expand. Then it comes back to that number, about 1,600. And then if we move it over here, if we're losing money on this side, you'll see it starts to expand as well. And when you look at the margin required on the actual strategy we're set up, you can see it's about $1,600. And that's where price is right there. But if I'm moving the hash mark to give me a theoretical idea of what my margin requirement would be at different levels, that's where you see that number change. And that's where you can get a theoretical idea of where that margin requirement might be based on what happens in your trade throughout the life of the trade. So on an undefined risk trade, that margin requirement can change. Going back to the Iron Condor example, it's the same thing though from a standpoint of how do you look at buying power versus margin. You've got a margin required of $1,600, but we're collecting $4.40. Or a max profit of $440. And so you just take that $1,603. $1,603 minus $440. And that gives you $1,163. So that would be the approximate actual buying power. That's the actual capital you need in your account to initiate this trade. Just remember, options are leveraged instruments. And so we always talk about in our courses, in our community, keep your position size small, especially if you're trading undefined risk trades. You know, if you're trading an Iron Condor, which is defined risk, obviously you know what your max risk is on that trade. So if things get crazy, you know exactly the maximum amount you can lose. On undefined risk, it's undefined, right? So you have to create that safety net. You have to protect yourself by keeping your position size super small so that you can manage, even if there is a massive move in the market. One last point as it relates to margin requirement versus buying power, and that is if you are trading options on futures. So for example, on this example of a short strangle in 4 slash CL or oil. Now the margin required minus the credit received is not necessarily the case if you're trading options on futures. Futures options use a completely different calculation for determining your overall margin requirement if you are trading undefined risk trades. I'm not gonna get into it in this video because it's beyond the scope of this video, but we have other blog posts around span margining, which is what is used to determine the margin requirements for futures. We have an entire course dedicated to futures options because there's so many different nuances and technicalities when it comes to figuring out what your margin requirement and buying power effect is when trading undefined risk trades on futures options. I hope this lesson has been helpful. If you have any other questions, feel free to drop us a line in our community at community.navigationtrading.com. See you there.