Should You Use Margin When Trading Options? | David Jaffee
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Margin When Trading Options

Should You Use Margin When Trading Options?

David Jaffee of BestStockStrategy.com breaks down the pros and cons of using margin when trading. 

By understanding the pros and cons of using margin when trading options, you can make a more educated decision on whether you should use margin or not.

Learn more about using margin when trading by visiting BestStockStrategy.com. Enter in your email address and receive over $400 of valuable free options trading materials.

The Pros of Using Margin When Trading

The first benefit of using margin when trading options is that there is no margin interest. 

Unlike with stocks, you do not need to pay margin interest when using margin. 

The second benefit of using margin is that it provides much greater capital efficiency.

If you're not using margin, then you will use cash-secured options. As a result, the buying power requirements for those trades will be significantly higher.

Additionally, because you're not using margin, you might be tempted to choose more aggressive strike prices in order to collect more premium. When you're using cash-secured options, you may want to collect more premium to offset the buying power reduction. 

This will also increase your risk.

When using margin, it will afford you an opportunity to go further out-of-the-money and therefore decrease your risk.

The third benefit of using margin is that it provides you with greater leverage and therefore the possibility of earning greater returns (although you'll need to reduce tail risk because leverage works in both directions).

The fourth benefit of using margin is that it provides you with more flexibility.

It is important to remember that just because you have margin doesn't necessarily mean that you have to use it. You can enable margin on your account, whether it be Regulation T or portfolio margin, and then you can invest the option premium in treasury bills to earn 5% interest.

The Cons of Using Regulation T or Portfolio Margin When Trading

The first disadvantage of using margin when trading is that you are incurring greater risk.

Remember that with the possibility of greater returns comes greater risk. Leverage is a double-edged sword, and it cuts both ways.

While you have the possibility of earning higher returns when using margin, you are also incurring more risks.

The second drawback of enabling margin is that human beings are inherently greedy and self-destructive.

You know yourself best. If you feel that you have a tendency to be a gambler or to trade too large, then David Jaffee highly recommends that you do not enable margin on your account

The third disadvantage of margin Is that your account may not allow you to use margin, depending upon the account that you are using to trade. Some retirement accounts, whether it be an IRA or 401k, will not permit you to use margin.

In those situations, oftentimes you can trade vertical put credit spreads, where you sell an option and buy a lower priced put option as protection. 

Or if you were trading a call credit spread, you would sell a call option and then buy a higher priced call option as protection.

Should You Enable Margin When Trading Options? 

Should you enable margin, whether it be Regulation T or Portfolio Margin, or should you not enable margin and just trade cash-secured puts or cash-secured call options?

David Jaffee recommends enabling margin because it is your choice whether you actually utilize that margin and enabling margin provides you with more flexibility.

As long as you possess discipline and patience, you can simply reduce your available buying power by the amount that your account would be reduced If you were trading cash-secured options.

Additionally, David Jaffee believes that by not enabling margins, you are encouraging yourself to be more aggressive with your strike selection, whether that be trading straddles or trading at-the-money options.

Instead, David Jaffee recommends that you trade out-of-the-money options and collect slightly less premium, but also significantly increase your win rate when selling options and trading options.

By using margin when trading, your trades will be more capital efficient and you can trade further out of the money while still collecting significant premium.

Learn more about using margin when trading by visiting BestStockStrategy.com. Enter in your email address and receive over $400 of valuable free options trading materials.

Frequently Asked Questions (FAQs)

Should I use margin when trading?

It depends; margin increases both your possibility for gains and also your possibility for losses. Experienced and disciplined traders should enable margin, but those who have a propensity to gamble are likely better off not using margin.

Does margin provide free leverage?

When trading stocks, you're charged margin interest.

When using Portfolio Margin, you're provided with free leverage.

Personally, I love using Portfolio Margin because I can invest the collected premium in treasury bills and collect ~5% risk-free interest (as of April 23, 2023).

Which is better, Portfolio Margin or Regulation T?

To qualify for Portfolio Margin, most brokerages will require a minimum of $150,000.

Traders can qualify for Regulation T margin with as little as $2,000.

In general, Portfolio Margin is about 5x more capital efficient than Regulation T.

Portfolio Margin looks at the volatility of your entire portfolio.

You can contact your brokerage and ask them if you meet their requirements for Portfolio Margin.

About the Author David Jaffee

I (David Jaffee) help people become consistently profitable traders while minimizing risk. I graduated from an Ivy League University and worked at some of Wall Street's most successful investment banks. Subscribe to my YouTube channel for valuable videos - BestStockStrategy YouTube Channel‚Äč. Finally, if you're looking to Land a Finance Job, then I've put together the best step-by-step course at LandaFinanceJob.com. My personal website is DavidJaffee.com.

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