Introduction
CBOE Regulatory Circular Re: Portfolio Margining of Customer Accounts (Dated Dec. 15, 2006)
Press Release Dated Dec. 13, 2006
Examples Comparing Strategy and Portfolio Margining Methodologies (Dec. 2006)
Please note that the links below do not reflect the new portfolio margining rules that become effective in April 2007.
Margin Calculator
Changes for Portfolio Margining for Index Options Approved in 2005
Overview of Margin Requirements
Margin Requirements for Certain Positions
Escrow Receipts
Investor Protection
Changes to Margin Rules in 1999 and 2000
For additional margin information, please also see the following web page: http://www.cboe.com/SECMargin
Introduction
Following is a brief summary of the margin requirements and escrow receipt program that apply to
options traded on the Chicago Board Options Exchange (CBOE). This is only a brief summary and
should only serve as a supplement to careful review of relevant CBOE rules and federal securities
laws dealing with margin requirements. For more information on margin requirements for options,
please contact CBOE's Department of Financial and Sales Practice Compliance at (312) 786-7718. In
addition please see the discussion of margins in the
Characteristics and Risks of Standardized Options
publication, Chapter 12 of the rules of the CBOE, and also the 41-page
CBOE Margin Manual.
The requirements explained here are based on publication date rules and regulations, and therefore, subject to change. This website should be used as a reference document and is not intended to be an all-encompassing restatement of Federal Reserve Board and Exchange margin rules. Brokerage firms may require customers to post higher margins than the minimum margins specified on this website.
Expanded Portfolio Margining In 2007
The SEC has approved amendments to CBOE rules that allow for expanded portfolio margining for customer accounts. The new rules become effective in April 2007. Further details of the new portfolio margining rules can be found at www.cboe.com/legal (Rule Filing SR-CBOE-2006-014). Click here for examples comparing strategy and portfolio margining methodologies as of December 2006.
Please note that the items below do not reflect the new portfolio margining rules that become effective in April 2007.
Changes for Portfolio Margining and Cross-margining Approved in July 2005
In July 2005 the SEC approved new rules regarding portfolio margining and cross-margining for index options positions of certain customers. Please see the attached PDF files for the SEC approvals of changes to CBOE rules and NYSE rules. Documents that summarize the changes include:
Customer Portfolio Margin Summary
CBOE Summary of Portfolio Margin Rules
Overview of Margin Requirements for Options
In the stock market, "margin" refers to buying stock or selling stock short on credit. A
margin customer pays for half (50%) of the cost of buying stock (the margin) and the brokerage firm
lends the customer the balance. Margin customers are required to keep securities on deposit with
their brokerage firms as collateral for their borrowings. Buyers of options can now buy equity
options and equity index options on margin, provided the option has more than nine (9) months until
expiration. The initial(maintenance) margin requirement is 75% of the cost(market value) of a
listed, long term equity or equity index put or call option. One who takes a "long" position in a
non-marginable put option or call option is required to pay the premium amount in full.
In the options market, "margin" also means the cash or securities required to be
deposited by an option writer with his brokerage firm as collateral for the writer's obligation to
buy or sell the underlying interest, or in the case of cash-settled options to pay the cash
settlement amount, if assigned an exercise. Minimum margin requirements currently are imposed by
the options markets and other self-regulatory organizations, and higher margin requirements may be
imposed either generally or for certain positions by the various brokerage firms.
Uncovered writers may have to meet calls for substantial additional margin in the event of adverse
market movements. Even if a writer has enough equity in his account to avoid a margin call,
increased margin requirements on his option positions will make that equity unavailable for other
purposes.
If a holder of a physical delivery call option exercises and wishes to purchase the underlying
interest on credit, the holder may be required to deposit margin with the holder's brokerage firm.
Holders of physical delivery options on a foreign currency should be aware that, at the date of
this booklet, foreign currency has no value for margin purposes except to the extent that credit
has been extended on the same foreign currency.
Certain limited risk spreads, butterfly spreads and box spreads (collectively referred to as
"spreads") may now be established and carried in a cash account. Provided the spread is
composed of European style, cash settled index options that all expire at the same time, it may be
effected in the cash account. Butterfly spreads and box spreads must meet the definition contained
in Exchange's Rule 12.3(a). The requirement for debit (or long) spreads is to pay for the net
debit in full. For credit (or short) spreads, cash or cash equivalents equal to the maximum risk
(less the net credit received for selling the spread) must be deposited and held in the account.
Exchange rules also provide for lower maintenance margin requirements for the underlying instrument
in certain strategies that employ a long American style option as a hedge.
Margin requirements for option writers are complex and are not the same for every type of
underlying interest. Margin requirements are subject to change, and may vary from brokerage firm
to brokerage firm. However, margin requirements can have an important effect on an option writer's
risks and opportunities. Persons considering writing options (whether alone or as part of multiple
position strategies, such as spreads or straddles) should determine the applicable margin
requirements from their brokerage firms and be sure that they have sufficient liquid assets to meet
those requirements in the event of adverse market movements.
Margin Requirements for Certain Options Positions
This schedule contains a description of Exchange margin requirements for various positions in put options, call options, and underlying positions offset by call option positions. Positions may be margined separately to obtain the lowest requirement. The CBOE's Margin Manual has detailed information on other options positions, including spreads and straddles/combinations.
| Position |
Option Type |
Cash Account Initial Requirement |
Margin Account Initial Requirement |
Margin Account Maintenance Requirement |
| Long Put or Long Call - 9 months or less until expiration |
Equity; Broad and Narrow Based Indexes; Interest Rate Options; Long CAPS |
Pay for each put or call in full. |
Pay for each put or call in full. Cash need not be deposited in excess of put or call cost. |
None required. |
| Long Put or Long Call - more than 9 months until expiration |
Equity; Broad and Narrow Based Equity Indexes only. Other than equity options and broad-based and narrow-based equity index options, only stock index warrants are eligible for purchase on margin. [For all other option types, the requirement is the same as for a 9 month or less option (above).] |
Pay for each put or call in full. |
Listed 75% of the total cost of the option. OTC 75% of the intrinsic value (in-the-money amount) of the option plus 100% of the amount by which the option's purchase price exceeds its in-the-money amount. OTC option must be guaranteed by the carrying broker-dealer. |
Listed 75% of option market value. OTC 75% of the intrinsic value of the option. Note that in either case, the option has no value for margin purposes when time remaining to expiration reaches 9 months. |
| Short Put or Short Call |
Broad-based Index |
Deposit cash or cash equivalents equal to aggregate exercise price or escrow agreement for a short put. Deposit broad based index option escrow receipt for a short call. Sale proceeds not released until deposit is made. |
100% of option proceeds plus 15% of underlying index value less out-of-the-money amount, if any, to a minimum of option proceeds plus 10% of underlying index value for calls; 10% of the put exercise price for puts. |
For each short option, 100% of option market value plus 15% of the underlying index value less the out-of-the-money amount, if any, to a minimum of option market value plus 10% of underlying index value for calls; 10% of the put exercise price for puts. |
| Short Put or Short Call |
Equity, Narrow- based Index |
Deposit cash or cash equivalents equal to aggregate exercise price or escrow agreement for a short put. For a short call, deposit underlying security or escrow receipt. Sale proceeds not released until deposit is made. |
100% of option proceeds plus 20% of underlying security/index value less out-of-the-money amount, if any, to a minimum of option proceeds plus 10% of underlying security/index value for calls; 10% of the put exercise price for puts. |
For each short option, 100% of option market value plus 20% of underlying security/index value less out-of-the-money amount, if any, to a minimum of option mkt. value plus 10% of underlying security/index value for calls; 10% of the put exercise price for puts. |
| Position |
Option Type |
Cash Account Initial Requirement |
Margin Account Initial Requirement |
Margin Account Maintenance Requirement |
| Short Put and Short Call1 |
Broad- and Narrow-based Indexes |
Deposit appropriate escrow receipts. See short put/short call requirement. |
For the same underlying index with the same index multiplier, short put or short call requirement, whichever is greater, plus the option proceeds of the other side. |
For the same underlying index with the same index multiplier, short put or short call requirement, whichever is greater, plus the current option market value of the other side. |
| Short Put and Short Call |
Equity |
Deposit appropriate escrow receipts. See short put/short call requirement. |
For the same underlying security, short put or short call requirement, whichever is greater, plus the option proceeds of the other side. |
For the same underlying security, short put or short call requirement, whichever is greater, plus the current option market value of the other side. |
| Short Call and Long Underlying (not permitted for index, CAPs or interest rate options) |
Equity |
Pay for underlying position in full. |
No requirement on short call. 50% requirement on long stock position. |
No requirement on short call. 25% requirement on long stock. Long underlying position must be valued at the lower of current market value or call aggregate exercise price. |
(1) Option guarantee letters are not currently acceptable in lieu of a margin deposit for short
interest rate option calls. In many instances, institutional entities are not barred from trading
these instruments on a margin basis, provided that the options serve to offset the risk exposure of
other interest rate investments.
Escrow Receipts
Many institutional accounts maintain their assets at a custodian bank, not at a broker-dealer.
Exchange margin rules allow a broker-dealer to accept an "escrow agreement" in respect of
short options, in lieu of cash or securities. An escrow agreement (also escrow receipt or option
guarantee letter) is a document that, according to Exchange Rules, must be issued by a bank and be
in a form which is acceptable to the Exchange. Broker-dealers may require that an escrow
agreement be in a form that will be accepted by the Options Clearing Corporation.
In respect of an escrow agreement for a short equity call option, the issuing bank promises to
deliver the underlying stock to the broker-dealer in the event the customer's account is assigned.
In issuing an escrow agreement for a short equity put option, the bank promises to deliver cash in
the amount of the aggregate put exercise price in the event the customer's account is assigned.
Exchange Rules also allow bank issued escrow agreements to be accepted for short index option
positions. In issuing an escrow agreement for a short index call option, a bank attests that it
will hold cash, cash equivalents, at least one marginable equity security, or a combination of the
three. The total value of the assets held by the bank must equal the aggregate underlying index
value on the trade date. As with short equity put options, an escrow agreement respecting a short
index put option must be backed by cash or cash equivalents at the bank which equal the aggregate
put exercise amount. In the case of both index calls and puts, the bank issuing the escrow
agreement promises to deliver the in-the-money amount to the broker-dealer in the event the
customer's account is assigned. The escrow agreement must give the bank the authority to liquidate
assets held under the agreement if necessary to meet an assignment.
For more information on current margin requirements for options, please contact CBOE's Department
of Financial and Sales Practice Compliance, (312) 786-7718.
Investor Protection
Virtually all CBOE options contracts are issued by the Options Clearing Corporation, a
clearinghouse with a triple-A credit rating from the Standard & Poor's Corporation.
Click here for more details on Investor Protection.
Changes to Options Margin Rules Approved by the SEC in 1999 and 2000
In 1999 and 2000 the SEC approved changes to options margin rules of the CBOE and NYSE. Some of the
changes include:
- Loan Value for Long-Term Listed Options and for Certain Long Box Spreads. Member firms may
now lend up to 25% of the current market value of a listed option that has more than 9
months until expiration. Thus, the initial and maintenance margin is 75%. Member firms may
lend up to 50% of the difference in the aggregate exercise prices on a long box spread if it
is comprised of European style options.
- Reduced Maintenance Margin Requirements for Stock Positions Hedged With Options. These
include protective puts, protective calls, conversions, reverse conversions and collars.
- Recognition of Certain Long and Short Butterfly Spreads; and Long and Short Box Spreads.
Eligible long butterfly and box spreads will pay in full the net debit incurred (i.e., the
maximum risk). Eligible short (credit) butterfly and box spreads will pay the difference
between the exercise prices. Net credit received may be applied.
- Minimum Margin on Short, Uncovered Puts. The minimum requirement is now calculated using
the exercise price of the put rather than the current market value of the underlying.
- Provisions allowing certain spreads, including certain butterfly and box spreads, in cash
accounts if they are comprised of European style index options.
For more details, please click on:
The changes approved in 1999 represent just one phase of changes, and contain a number of
strategy-based enhancements and new capabilities for margin and cash accounts. Another phase of
change, which may begin in late 2000, is a portfolio margin approach, including a cross-margin
capability, which will be an alternative to strategy-based margin requirements for broad based
index options products.
Options involve risk and are not suitable for all
investors. Prior to buying or selling an option, a person must receive a copy
of Characteristics and Risks of Standardized
Options (ODD). Copies of the ODD are available from your broker, by
calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North
Wacker Drive, Suite 500, Chicago, Illinois 60606. The information on this
website is provided solely for general education and information purposes and
therefore should not be considered complete, precise, or current. Many of the
matters discussed are subject to detailed rules, regulations, and statutory
provisions which should be referred to for additional detail and are subject to
changes that may not be reflected in the website information. No statement
within the website should be construed as a recommendation to buy or sell a
security or to provide investment advice. The inclusion of non-CBOE
advertisements on the website should not be construed as an endorsement or an
indication of the value of any product, service, or website. The
Terms and Conditions govern use of this website and use of this website
will be deemed acceptance of those Terms and Conditions.