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Ask the Institute

DATE: September 24, 2012

QUESTION:

Could you please explain how the margin requirement for a credit spread is calculated?

ANSWER:
A margin requirement is frequently described as a good-faith deposit. It is a deposit of equity capital in a trading account that proves a trader can withstand a loss from an open position in that account. Many traders believe that a credit spread creates a deposit - or a credit - in their account. But, the reality is actually more complicated. While cash is generated from initiating a credit spread, that money plus more money is frozen against withdrawal until the credit spread position is closed. To learn more about the margin requirement for a credit spread is calculated, view this week's segment of "Ask the Institute.


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