Is A Margin Account Required For Trading Options
What Is Margin
Margin is a form of credit account. It allows qualified traders and investors to borrow funds or stock in order to make trades. Margin accounts are a requirement for some forms of trading like Day Trading and Short Selling.
The Short Answer Is No.....
No, you do not have to have a margin account to trade options. However, there are many different ways to trade options and your style may require you to have a margin account. Especially if you are trading frequently and qualify as a "Pattern Day Trader". Be sure to learn all you can before getting started so you don't fall in the margin account requirement trap.
What Is A Margin Account
Options and options trading has become one of the hottest new trends in personal finance. The ease of access allowed by the internet and the myriad trading platforms like Scottrade, OptionsXpress and E*Trade have combined to make the practice easier than ever. One of the first questions asked by new traders is whether you have to have a margin account in order to trade options. The easy answer is no; you do not have to have a margin account in order to trade options. The more complicated answer is maybe; You might have to have a margin account in order to trade options. In order to understand the difference you must first know what a margin account is.
Margin And My Trade Account
The difference between a margin account and an equity account is a margin account allows you to buy or trade securities equal to a far greater amount than the cash balance available. By definition margin is the amount of collateral or equity that an account holder has to deposit in order to cover the trade risks associated with the account. In more general terms margin is the amount of money you must keep in your margin account in order to buy and sell securities. Effectively, a margin account is like a line of credit extended by your broker. The amount of credit you receive is directly linked to how much cash is deposited in the account.
How Does Margin Work
After your account is funded your broker will extend a line of credit based on your account balance. Most margin accounts have a minimum balance that must be maintained. At the end of each trading day the cash balance and margin requirements of the account are calculated based on the days activity. After that the next days credit limit is set. If you go over the account limit for any one day or the cash value of the account falls below the account minimum then a margin call is made and you will have to deposit more cash in order to cover the margin requirements.
Well, Do You Have To Have A Margin Account To Trade Options
So, back to answer the question at hand; do you have to have a margin account to trade options? The answer to that depends on how you are trading options. If you are day trading you may be required to have a margin account. Day trading is when you buy and sell the same security, specifically an option, on the same day. If you buy one day and sell the next that is classified as day-to-day trading and does not fall under the same rules. You only have to have a margin account if you are marked as a Pattern Day Trader. A pattern day trader is a person who buys and sells a securit in the same day, 3 or more days out of five consecutive trading days. If you are pegged as a Pattern Day Trader then you will be required to maintain a margin account. In fact, if you are trading in an equity account and make enough trades to qualify as a Pattern Day Trader your account can be frozen until you meet the margin requirements.
Trading Options In An Equity Account
Trading options in an equity account is allowed. The caveat is that not all brokers allow options trading in equity accounts so be sure to check before depositing any money. When trading options be sure to keep track of your trades and do not make too many day trades. Also, because of the time between sale and settlement of your options (usually three days) you must also be sure not to use cash from the unsettled sale of options to buy any positions because this can also get you account frozen or suspended.
More by this Author
NADEX 20 minute binary options are a versatile tool for short term speculators.
What is a hedging strategy? How can binary options be used to for a hedged position? Can binary options be used in a hedging strategy?
There are four species of owls native to North Carolina. These owls and their distinctive calls are captivating creatures.