← IntermediateLesson 10 · 4:20
What is margin, and what can it do to you?
Summary
You can explain margin as money your broker holds against what a sold position could lose. You can see why holding less lets you sell more, how a fall squeezes your cushion into a margin call that can force you out at the low, and how a spread puts a floor under both the loss and the amount held.
Key terms
- margin
- Money your broker holds against what a sold position could lose.
- cash-secured
- Backing a sold put with the full strike times 100 in cash.
- cushion
- The money in your account not yet held as margin, which losses eat into.
- margin call
- A broker's demand to add cash or close positions when the cushion runs out; the broker can close them for you.
- credit spread
- A spread that pays you to open it.
Check yourself
Answer each question to see why the right answer is right.
1. You sell one XYZ $100 put for $341. Cash-secured, the broker holds $10,000. On the lesson's example rule (buy-back cost today plus 20% of the shares' value), how much is held on margin?
2. Margin holds $2,341 instead of $10,000 for the same put. Does that make the trade safer?
3. With $10,000, the example rule lets you back three puts instead of one. XYZ ends at $60. What happens?
4. XYZ slides from $100 to $91 over six days while you hold the three puts. Why does your cushion disappear?
5. Instead of the single put, you sell the $100 put and buy the $95 put for $141, collecting $200 net. XYZ falls straight to $85. How much is held?
Finished the video and the quiz? .