 Hey everyone, Lee Lowell here, smartoptionseller.com. How's everyone doing today? It is Saturday, August 7th, 2021. Welcome to another edition of our Saturday YouTube options educational videos. As you can see on your screen today, we are going to be talking about selling put options. Should you be using a cash account or a margin account? People send me questions, beginners from people who are selling options there and they wanna know, Lee, should I be selling these put options in a cash account or margin account? What's the difference? And I don't understand how the money works. Can you explain these things to me? Absolutely. So this is what we do here in our educational videos. We talk about an options trading topic. No matter what it is, people email me all the time. So I'm here to kinda educate you and enlighten you on how to trade options, how to become a better trader. So before we get started, I just wanna bring up one thing here. As we were talking about selling put options, I want everyone to please go to our website, smartoptionseller.com and download our free put selling basics ebook. So you go to our website, click on the put selling basics, put in your name and email address and we will send you a free copy. So let's get back to our little education here. Selling put options. Should you be using a cash account or a margin account? So let's take a step back and just explain what selling put options are and why using one of these different accounts is better or worse for you and it's all gonna depend on you. Now, when you sell a put option, what you're basically doing is you're obligating yourself to potentially buy a specific stock at a specific price by a specific time. And what price would you end up buying the stock at? Well, that's called the strike price, right? So if you sell a put option at a specific strike price, you're basically obligating yourself sometime in the future to potentially buy that stock at that price. Now, it's not a guarantee that you'll buy the stock because the stock has to move to a certain level in order for you to follow through and buy those shares of stock. So basically what you're doing is you're acting like an insurance company. You're selling somebody insurance on their stock that they may wanna sell their stock to you at some time in the future. And in exchange for your obligation, in exchange for your insurance, you're receiving a premium from that person. Just think about that. If you have car insurance and you pay the insurance company every month or every year, whatever, and as long as you don't get into a car accident, the insurance company keeps the money from you, keeps the money that you give them. It's the same thing when you sell a put option. Until a certain event happens, you're just going to keep that cash. And that's a source of income. A lot of people sell put options to create a current stream of income for themselves. But in the rare case that in this case, selling put option, if the stock falls from here to here, then you will be called upon to fulfill your obligation and buy those shares of stock. The good thing here that the insurance company doesn't have is that you as a put option seller, you control all the parameters. You can control what price that you would wanna buy the stock for in the future. So you get to pick the strike price and you pick the expiration date. The car insurance company, they have no control over when or if someone's ever going to get into a car accident. So you as a put option seller, you can control the strike price, the expiration date and for your obligation, you will collect a premium. But so that's the basics of selling a put option. But in order to actually sell a put option, you have to, these trades will have to be done in a stock brokerage account. Okay, so you have to have a broker account in order to sell put options. And you have to be approved to be able to sell put options. Not every broker will approve you right off the bat, especially if you're a new trader and you don't know what you're doing. So let's just say you're approved and you can sell put options. Now the question is, what kind of account should you sell these put options in? Do you use a cash account or a margin account? And let's explain the difference between the two. In a cash account, what will happen is when you sell a put option, you are obligated to, or your broker will hold a certain amount of funds aside while the trade is active. Now remember, you're not buying anything. You're not investing anything. So your money's not being debited from your account. Let's just say you buy 100 shares of a stock. And when you buy that stock, your broker debits your account for the price of the amount of shares that you bought. In this case, since you're selling the put option, you're not buying anything. You're actually selling it and you're getting money into your account, which is great. We love selling put options. But even so, your broker is going to hold a certain amount of your free cash funds aside. That's off limits. You can't use those funds while this trade is active. Once you sell the put option, a certain amount of money is gonna be held aside. Okay, it's not going anywhere. It's not being taken out of your account. It's just being put on hold. And so how much cash is going to be held aside when you sell a put option? Well, it depends on the strike price. It's completely dependent on the strike price. So let's look at my example here. When you sell put options in a cash account, your broker is going to hold aside 100% of the cost of if you actually went through with it and bought those shares of stock. Now you don't know if you're going to buy the shares of stock until expiration and it all depends on where the stock goes. But let's just say you had to follow through and buy those shares of stock. Let's look at our example here. Let's just say you sold a put option on a 100 strike put option, okay? That obligates you to buy 100 shares of stock at $100 a share. So that cost would be $10,000. The potential cost would be $10,000. So when you sell a put option on this 100 strike in a cash account, your broker is actually going to hold aside $10,000 of your free cash. Let's just say you have 100,000 in your account, 10,000 is held aside. Now you have $90,000 of free cash to play with. So your broker is holding aside $10,000. And that's what it would cost you to actually go ahead and buy those 100 shares at expiration. But since we don't know the outcome of the trade yet, we don't know if you're going to buy those shares yet. Your broker is still going to hold aside the full $10,000, even though you haven't bought anything yet. So you have to decide, is that something I wanna do? Do I wanna give up or hold aside $10,000 of my account when I haven't even bought the shares yet? So that's what happens in a cash account. Now a margin account is another kind of account that you can have at your broker, which in my opinion, I like to use a margin account better because your broker will only hold aside a fraction of that $10,000 aside while the trade is active. And while I mean the trade is active is until you actually close out the trade or you actually have to buy the shares. Now in a margin account, how much money will be held aside? It's a lot less than that $10,000. Most margin accounts today at most brokers today will hold anywhere between, right here, this is where my mouse is, anywhere from 10% to 20% of that full potential cost. So in this case, the full potential is $10,000. 10% to 20% of that is $1,000 to $2,000 that your broker will hold aside while the trade is active, okay? So that's 10% to 20%. It all depends on your broker. You have to find out what it is. Now, that's what's called the margin requirement. So when you sell a put option in a margin account, the margin requirement is somewhere in this 10% to 20% amount. Now, when the trade is over, that your free cash is released back to you. If the trade expires worthless and you don't have to go ahead and buy the shares of stock, those margin funds will be released back to you. But let's talk about this margin account here for a second. What's called the initial margin requirement is that 10% to 20%, so that's $1,000 to $2,000. And as the trade goes on, the stock fluctuates higher or lower, the margin requirement, this 10% to 20% can fluctuate higher or lower, depending on where the stock goes, all right? So if the stock starts to drop and it looks like, hey, you may actually have to buy those 100 shares of stock, the margin requirement will go up, meaning your broker wants to make sure you're good for that $10,000, so your margin can go up from 2,000 to 3,000 to 4,000. As the stock is dropping, your margin requirement will go up, can fluctuate. And people ask me all the time, do I have to pay money on, do I have to pay interest on this margin money? I don't understand. Margin requirement is completely different than the concept of buying on margin. Buying on margin is when you buy shares of stock and you pay for half the amount and you borrow the other 50% from your broker and you pay your broker interest on that margin money. That is not what we're doing when we sell options. When you sell options, it's called a margin requirement and it's just money that's held aside. There's no interest whatsoever that's involved with that, okay? So we talk about here the margin requirement. So do you open up an account or do you sell put options in a cash account or a margin account? It's completely up to you and it also depends on your broker. Now, one thing I do wanna point out is that in individual retirement accounts, at least here in the United States, you could not sell put options using margin. So when you sell a put option in an IRA and a retirement account, any kind of retirement account, you have to put up or keep aside the full 100% cost of the shares. That's just how it is. So if you wanna use margin, you have to do this in a non IRA margin account. Okay, so I wanna make sure we're clear on that. So when you sell put options in a margin account, you only have a fraction of your cash being held aside. And I think it's just a more efficient way to use your money because you don't know if you're gonna buy the stock. So why would you wanna put up 100% of the cost of that stock when you haven't even bought the shares yet? I just think it's an inefficient way to use your cash. So let's look at an example of how that actually works, how you can tell how much your broker is going to, how much margin requirement your broker will have when you sell a put option. Now I'll go into my, this is an interactive broker's account. This is a paper money account. This is not a real account, it's just fake money that everyone who has an interactive broker's account can have a fake account as well. So let's just take a look at AMD. This is option chains here, advanced micro devices. So we're gonna focus on the put options over here because that's what we're working on. So AMD's last trade price was $109.80. That's how it went out yesterday, Friday, August 6, 2021. So let's just say you're interested in selling the $75 put options on AMD. AMD's at just under $110 this year. You wanna sell these $75 put options because actually let's look at the $80 push put options because that's a $30 buffer, just about a $30 buffer between the current stock price and the strike price of $80. Now what you're going to do is if you sell an $80 put option on AMD, you're obligating yourself to buy 100 shares at $80 a share in October of 2021. AMD's at 110, AMD would have to drop all the way down to $80 in order for you to have to fulfill your obligation and buy those 100 shares. And you might be really happy about that because you get a $30 discount from where AMD is currently trading. So you're on the hook to buy 100 shares at $80 a share. That's an $8,000 potential cost to you somewhere down the road if AMD actually falls that far. If AMD doesn't fall that far, you don't have to buy the shares and you just keep the money that the put option by our pages. So how much money will you get? So the $80 puts it right here. Here's the bid ask comms. So on Friday, yesterday, August 6th, AMD 80 puts went out at 51 cent bid, 58 cent offer. Let's just say we can sell those things that in the middle, 55 cents a contract. That's 55 actual dollars that you will get when you sell one contract. You sell 10 contracts, you'll get $550, but then that obligates you to potentially buy 1,000 shares. So each option contract consists of 100 shares of stock. Let's make sure we understand that. So in order to invoke the trade, at least here in Interactive Brokers, if you wanna sell this put option, you click on the bid price and it's going to bring up an order ticket window. And it's for selling. You can see the action. The sell button is highlighted. You're gonna sell one contract of this $80 put and we're gonna put in a limit price of 55 cents a contract. So if the order goes through, you will have sold this contract for 55 cents a contract. That's 55 actual dollars that you will get deposited into your account. Now we're talking about what's the margin requirement? If this is done in a margin account, how much money is going to be held aside from your free cash while you sell this one put option contract? Well, you can click on the preview button and most brokers should have an account window like this that will tell you how much your potential margin requirement will be, your initial margin requirement will be when you first sell this put option. So here's the order preview window. We're gonna sell one contract, sell one of this AMD $80 put October for a limit price of 55 cents a contract. Now you have to multiply the price by 100 because that's a hundred shares. So you'll get actually $55 and down here you can see if filled, if you get filled, you will receive $55 into your account and here's the estimated commission for that one contract. Now here's where you wanna concentrate when you want to look for how much margin requirement and how much of your free cash will be held aside. Here's your current account balance and in these fake money accounts they start you off with a million dollars and it was a million 32 and after the trade you'll get roughly $53 after commissions put into your account. So this is how much money you'll have when the trade goes through. You'll have an extra $53 in your account. So concentrate here on these two numbers right here. This is the initial margin and this is the maintenance margin. We'll talk about that in a sec. But the initial margin is really the most important number because this is going to tell you right off the bat how much of your free cash is going to be held aside out of that potential 8,000. Remember buying 100 shares at $80 a share is a potential $8,000 investment if it comes to fruition. But the margin requirement is only $1,093. Okay, so that's a little over 10% that Interactive Brokers would be asking me to hold aside if I sell this put option. So let's just take a look. I'm gonna do my calculator. 1,093 divided by 8,000 is 13.6%. The margin requirement, the initial margin requirement is just 13.6% of that $8,000. So if you sell this put option you're gonna have to hold aside or your broker will hold aside $1,093. Out of your full cash balance. So out of my $1,000,000, I have to hold aside $1,093. Okay, that's what happens when you initially sell the contract. Now this maintenance margin of $860, which is just over 10%, is the minimum amount that you'll have to have on hold at all times while the trade is active. It can fluctuate higher than that, but at a minimum it's $860. Right now when you currently sell it, it's 1,093. And that can fluctuate higher or lower, depending on where the stock goes. Like I told you, if AMD starts to tick down from 110, down towards 80, your broker's gonna say, hey, it looks like you may have to buy these 100 shares, that'll cost $8,000. So they start to bump up your margin requirement. And if you click on your account screen, your general account screen, not this screen, your account screen, let's just say you've sold it and a month later, AMD has fallen, you go into your account screen and you'll see what your current margin requirement is. It'll probably be higher than this $1,000 because AMD's stock price is starting to drop. So you use this order preview window to gauge how much your initial margin requirement would be and that's how much of your free cash balance will be held aside. Okay, so it's very simple to understand that. And each broker's probably a little different. So you wanna figure out how much each broker's going to hold aside. Now, if you were selling this, if you were making this potential trade in a cash account, the window, no, I don't do this in a cash account. So I'm just guessing the window is gonna say the margin is $8,000 because they're going to hold aside $8,000 in a cash account. So out of your million dollars, you're gonna have $8,000 held aside. Okay, so we close this out. We're gonna close this out because we're not actually putting this trade through. So that's really how it works when you're selling put options. Do you wanna do it in a cash account or do you wanna do it in a margin account? It's up to you to decide. Now, some people like to do it in a cash account because they like to know how much cash that they really might have to use if they have to go through and buy these shares as stock. So people will sell multiple put options on multiple different stocks using multiple contract amounts. So they wanna know how much cash, if everything craps out and they have to purchase all those put options, all those shares of stock all at the same time, how much cash would they have to use? So in a cash account, you'll know at all times how much money's on the line. In a margin account, if you're selling multiple contracts on multiple stocks, the margin requirement is just a snapshot, just a small bit of how much cash will be held aside. So if everything craps out, if all the stocks fall at the same time and all your positions, you may have to come up with all this cash to pay for all these shares. And the margin requirement is only showing you a fraction of that. So you may get a load into a false sense of security of how much cash, free cash you actually have. And you don't wanna be hit with the dreaded margin call. The margin call is when your broker emails you or calls you up and says, hey, you don't have enough free cash in your account to cover all these potential positions, we're going to need you to deposit more money into your account or we're going to start liquidating other positions. So you don't want that to happen because you may have positions that you don't want liquidated. So you need to be careful when you're trading with margin, you have to know at all times, where your current cash balance is and how much is being used or potentially going to be used if you have to buy all these shares of stocks. So just keep that in mind. That's why some people like to trade these, sell these put options in a cash account. All right, so that's really all about it for which account you can use for selling put options. Like I said, we like to use put options, selling put options in a margin account because it's better use of your money but also at the same time, you have to be aware of how much of your free cash you're using, okay? All right, so that's it. That's your little lesson for today. Let's quickly go back to our website, smartoptionsseller.com, talked about the free put selling basis guide and in this guide, I also talk about the margin requirements. So you can read about a little bit more. I pretty much say exactly what I've said here in this video, but if you want to read it, it's all in there. Also at our website, smartoptionsseller.com, we have our services tab. We have two newsletters. We have a naked put option selling newsletter and an option, a put option credit spread newsletter. Those are our two newsletters and we have our one-on-one coaching. If you need help getting to the next level, we can certainly help you with that. All right, so I hope this video has been helpful to you. Please don't forget to subscribe. Hit that red subscribe button in the bottom right hand corner of the video and turn on your notifications. You'll get, you'll know when I put out a new video. Please give me a thumbs up if you think this has been helpful. Leave me a comment. Also send me an email. I will always answer you. Okay, that's it for me today. I hope everyone has a great weekend and a great trading week ahead. This is Lee Lowell, signing off.