Margin treatment

Assignment margin cascade

When a short leg of a defined-risk spread is assigned before expiration, the resulting stock position carries a full stock margin requirement, which is far larger than the spread requirement it replaces. The account can breach maintenance margin overnight even though the position's maximum loss has not changed.

• Example shape: a short in-the-money call in a credit call spread is assigned, creating a short stock position. The long call still caps the loss, but the broker now margins short stock, not a spread.
• The usual outcome is a margin call resolved by exercising the long leg or closing the stock, both of which realise the position early.
• This is a liquidity risk, not a loss risk. The maximum loss on the spread is unchanged. The account simply may not have the cash to hold it.

Portfolio margin

A risk-based margin methodology that computes requirements from a stress test of the whole position across a range of underlying price and volatility moves, rather than applying fixed rules per strategy.

• Generally requires a substantial minimum account equity and approval from the broker.
• Produces materially lower requirements for genuinely hedged books and materially higher requirements for concentrated single-name risk.
• Requirements move with market volatility, so a position that was comfortably margined can become undermargined without any trade being placed.

Also described at: Wikipedia · Wikidata · FINRA Rule 4210 (Margin Requirements)

Regulation T versus portfolio margin

Two different methodologies for computing a requirement. Regulation T and the associated FINRA maintenance rules apply fixed formulas per strategy. Portfolio margin computes a single requirement from a stress test of the whole position across a defined range of underlying price and volatility moves, and takes the worst outcome.

Field	Value
Reg T basis	Strategy-based. Each recognised structure has its own formula, applied leg by leg or pair by pair
Portfolio margin basis	Risk-based. The requirement is the largest projected loss across a grid of price and volatility shocks
Effect on hedged books	Portfolio margin generally lower, because offsetting legs are recognised
Effect on concentrated books	Portfolio margin generally higher, because the shock grid is wider than any fixed percentage
Practical constraint	Portfolio margin requires broker approval and a substantial minimum equity

• Under Reg T a structure that is not one of the recognised patterns is margined as its individual legs, which can produce a requirement far above the actual maximum loss. Legging into a spread and having it recognised are different events.
• A portfolio margin requirement moves with market volatility, so a position can become undermargined with no trade placed and no change in its maximum loss.
• House requirements sit above both methodologies and are the number that actually binds. Neither the regulatory baseline nor a published table is a commitment by any broker.

Source: Reg T / 12 CFR 220; FINRA Rule 4210

Also described at: Wikipedia · Wikidata · 12 CFR Part 220 (Regulation T) · FINRA Rule 4210 (Margin Requirements)

Buying-power reduction for defined-risk structures

For a recognised spread the requirement equals the maximum loss, so buying-power reduction and maximum loss are the same number. This makes the capital arithmetic for defined-risk structures fully determined at entry.

Field	Value
Formula	BPR = MaxLoss * multiplier = (StrikeWidth - NetCredit) * multiplier for a credit spread; NetDebit * multiplier for a debit spread
Credit vertical	(K2 - K1 - C) * multiplier
Debit vertical	D * multiplier
Iron condor	(max(K2 - K1, K4 - K3) - C) * multiplier, one side only
Iron butterfly	(W - C) * multiplier
Butterfly or condor bought for a debit	D * multiplier
Long option	Full premium, paid in cash
Worked	A 5.00-wide credit vertical collected for 1.60: BPR = (5.00 - 1.60) * 100 = 340.00. The 90/95/105/110 iron condor collected for 1.60 has the same 340.00 requirement while collecting two credits, because only one side can lose. Return on committed capital at maximum profit = 160.00 / 340.00 = 47.06 percent

• Symmetric iron condors and single credit verticals of the same width consume identical capital. That is a property of the margin rule, not of the risk.
• Unequal wings mean the requirement is set by the wider wing. Widening one side of a condor to collect more credit raises the requirement by the full amount of the widening.
• A spread that is not recognised as a pair - mismatched expirations, mismatched quantities, or one leg in a different product - is margined leg by leg, and the naked-leg requirement can exceed the maximum loss several times over.

Also described at: FINRA Rule 4210 (Margin Requirements)

Buying-power reduction for uncovered options

The Regulation T baseline requirement for a naked short option is the premium received plus the greater of two percentage floors, one measured against the underlying value less the out-of-the-money amount and one an absolute floor.

Field	Value
Formula	Requirement = Premium + max(0.20*U - OTM, floor), where U is underlying value per share and OTM is the out-of-the-money amount
Naked call floor	0.10 * U
Naked put floor	0.10 * K
OTM amount (call)	max(K - U, 0)
OTM amount (put)	max(U - K, 0)
Worked	U = 100. Naked put at K = 95 sold for 2.40: 0.20 * 100 = 20.00, less the 5.00 OTM amount = 15.00; floor 0.10 * 95 = 9.50; the greater is 15.00; requirement = 2.40 + 15.00 = 17.40 per share, 1,740.00 per contract. Naked call at K = 105 sold for 1.90: 20.00 - 5.00 = 15.00 against a floor of 10.00; requirement = 1.90 + 15.00 = 16.90 per share, 1,690.00 per contract

• The requirement is a fraction of the maximum loss, not a bound on it. The naked put above requires 1,740.00 against a maximum loss of 9,260.00.
• The requirement rises as the option moves in the money, because the out-of-the-money deduction shrinks toward zero. A losing naked position demands more capital exactly when the account has less.
• The same short put secured with cash requires 9,500.00 rather than 1,740.00 for an identical payoff. The difference is leverage, and it is the entire difference between the two labels.

Source: Reg T / 12 CFR 220; FINRA Rule 4210

Also described at: 12 CFR 220.12 (Regulation T margin requirements) · OCC equity options contract specifications

How assignment changes the requirement

Assignment replaces an option position with a stock position, and the stock margin rule replaces the option margin rule. The maximum loss does not change; the capital needed to hold the position does, usually upward and immediately.

Field	Value
Formula	Post-assignment stock requirement = K * shares * initial or maintenance rate
Reg T initial on long stock	50 percent of market value
Maintenance on long stock	25 percent of market value under the FINRA baseline
Short stock maintenance	The greater of a percentage of market value or a per-share minimum, higher than for long stock
Worked	A cash-secured put at K = 95 is assigned: the account buys 100 shares for 9,500.00. Against that, the pre-assignment requirement as a naked put was 1,740.00 and as a cash-secured put was 9,500.00. Post-assignment the Reg T initial figure is 0.50 * 9,500.00 = 4,750.00 and the maintenance figure is 0.25 * 9,500.00 = 2,375.00

• A naked short put margined at 1,740.00 becomes a stock position requiring 4,750.00 initial on assignment. The account can be in a deficit the morning after with no adverse price move.
• In a credit spread the long leg still caps the loss after the short leg is assigned, but the broker now margins a stock position, not a spread. The usual resolution is to exercise the long leg or close the stock, both of which realise the outcome early.
• This is a liquidity event, not a loss event. Distinguishing the two is the difference between a planned exit and a forced one.

Source: Reg T / 12 CFR 220; FINRA Rule 4210

Return on committed capital

The comparable measure across structures, because premium collected is not comparable when the capital committed differs. Stated as maximum profit over the capital the position actually ties up.

Field	Value
Formula	RoC at max profit = MaxProfit / BPR
Credit vertical	C / (W - C)
Cash-secured put	P / K
Naked put (Reg T)	P / (P + max(0.20*U - OTM, 0.10*K))
Worked	5.00-wide credit vertical at 1.60: 160.00 / 340.00 = 47.06 percent. Cash-secured put at K = 95 for 2.40: 240.00 / 9,500.00 = 2.53 percent. The same put margined naked: 240.00 / 1,740.00 = 13.79 percent. All three have a fixed maximum profit and the same arithmetic; they differ only in what is set aside

• A higher return on committed capital is a statement about leverage, not about expected value. The three worked figures describe the same or similar payoffs under different capital treatments.
• Return on capital at maximum profit is not expected return. Multiplying it by the probability of the maximum outcome is the minimum correction, and even that ignores the partial outcomes in between.

Regulation T requirement formulas, structure by structure

Regulation T margin is strategy-based: each recognised structure has its own formula and the account's requirement is the sum over recognised structures. The formulas are arithmetic, not discretionary, and they are a floor rather than the binding number, because house requirements sit on top.

Field	Value
Formula	Uncovered option: Requirement = Premium + max(0.20*U - OTM, floor), where floor = 0.10*U for a call and 0.10*K for a put, and OTM = max(K - U, 0) for a call and max(U - K, 0) for a put
Long option, 9 months or less	Pay the premium in full. No margin available
Debit spread	Pay the net debit in full
Credit spread	(Width minus credit) times the multiplier, which equals the maximum loss
Iron condor	The wider wing less the credit, one side only, because only one side can lose
Cash-secured put	Strike times the multiplier held in cash, which exceeds the maximum loss by the premium received
Worked	Underlying at 100, premiums from Black-Scholes-Merton at the reference inputs. Naked 105 call at 2.3909: 0.20*100 = 20.00, less the 5.00 out-of-the-money amount = 15.00, against a floor of 0.10*100 = 10.00; the greater is 15.00, so the requirement is 2.3909 plus 15.00 = 17.3909 per share, 1,739.09 per contract. Naked 95 put at 1.6006: 20.00 minus 5.00 = 15.00 against a floor of 0.10*95 = 9.50; requirement 1.6006 plus 15.00 = 16.6006 per share, 1,660.06. Naked 100 put at 3.4902 with no out-of-the-money amount: 20.00 against a floor of 10.00, requirement 3.4902 plus 20.00 = 23.4902 per share, 2,349.02. A 95/100 credit put vertical collected for 1.8896 requires (5.00 minus 1.8896)*100 = 311.04, and the 100/105 credit call vertical collected for 2.0944 requires (5.00 minus 2.0944)*100 = 290.56

• The out-of-the-money deduction shrinks as the option moves toward the money, so an uncovered requirement rises as the position loses. It is the only common requirement that is procyclical against the account.
• The 20 percent figure applies to individual equities. Broad-based index options carry a lower percentage and narrow-based indices sit between. Confirm the applicable figure before computing.
• The cash-secured put requirement exceeds the maximum loss, because the loss is K minus the premium and the requirement is K. That structure is over-collateralised by exactly the credit received.

Source: Reg T / 12 CFR 220; FINRA Rule 4210

Regulation T on a short straddle

A short straddle is not charged as two uncovered options. The recognised treatment charges the uncovered requirement on the greater side and adds only the premium of the other side, because both sides cannot finish in the money.

Field	Value
Formula	Requirement = max(NakedCallReq, NakedPutReq) + min(CallPremium, PutPremium)
Why only one side	At expiration at most one of the two options has intrinsic value, so charging both uncovered requirements would double-count
What the second side costs	Its premium only, which is the amount needed to buy it back at the current mark
Short strangle	Same treatment with the two different strikes, so the greater side is whichever produces the larger uncovered figure
Worked	Short 100 straddle at the reference inputs, underlying 100. Model premiums: call 4.4852, put 3.4902. Naked call requirement = 4.4852 plus max(20.00 minus 0.00, 10.00) = 24.4852 per share, 2,448.52 per contract. Naked put requirement = 3.4902 plus max(20.00 minus 0.00, 10.00) = 23.4902 per share, 2,349.02 per contract. The straddle requirement is the greater, 2,448.52, plus the smaller premium, 349.02, giving 2,797.55 per contract. Charging both uncovered requirements would give 4,797.55, so recognising the structure saves 2,000.00 - which is exactly the 0.20*U term on the smaller side

• The saving is exactly the percentage-of-underlying term on the cheaper side, 2,000.00 in the worked case. It is not a proportional discount and it does not scale with the premiums.
• The requirement is recomputed daily as the underlying moves, so it rises on whichever side is going against the position. The number at entry is not the number that gets called.
• The structure has to be recognised by the broker's margin system as a straddle. Legging into it can leave the two options charged separately until the system pairs them, which is a real and avoidable liquidity event.

Source: Reg T / 12 CFR 220; FINRA Rule 4210

The portfolio margin stress-scenario grid

Portfolio margin replaces the strategy formulas with a revaluation of the whole position across a grid of underlying price shocks, and takes the largest loss as the requirement. For individual equities the stated range under FINRA Rule 4210 is plus and minus 15 percent, evaluated at ten equidistant points.

Field	Value
Formula	Requirement = maximum over the grid of [ V(S*(1 + shock)) - V(S) ] expressed as a loss, with V a full revaluation of every position
Range, individual equity	Plus and minus 15 percent under the stated rule
Range, high-capitalisation broad-based index	A narrower range applies, segmented by size of move. Confirm the current figures in the rulebook
Grid resolution	Ten equidistant points across the range, so eleven valuation points including the unshocked one
What the grid does not shock	The equity grid shocks price. A separate volatility shock is not part of the stated equity methodology, which is a material difference from SPAN
Worked	Ten short 100-strike straddles at the reference inputs. Entry credit 7,975.46, so the position value is minus 7,975.46. Revaluing across the grid: at minus 15 percent the value is minus 14,512.09, a loss of 6,536.63; at minus 3 percent, a loss of 3.63; at zero, no change; at plus 3 percent, a loss of 701.61; at plus 15 percent the value is minus 16,623.28, a loss of 8,647.82. The largest loss is 8,647.82 at plus 15 percent, so that is the requirement. The Regulation T requirement for the same position is 10*2,797.55 = 27,975.46, so portfolio margin is 30.91 percent of the strategy-based figure. Adding a simultaneous 10-volatility-point shock at each price point raises the worst loss to 10,689.87, 1.24 times the price-only grid, and still only 38.2 percent of the Regulation T figure

• The grid is asymmetric in outcome even for a symmetric position, because a call loses more on the way up than a put loses on the way down for the same percentage move. The worst point on the worked straddle is the upside, not the downside.
• Because the requirement is the largest loss in the grid rather than a percentage of anything, it falls sharply for a hedged book and rises for a concentrated one. That is the design, not a side effect.
• The grid values the position at a stated volatility. A short-gamma position whose real risk is a volatility spike is charged for the price move and not for the volatility move, which is exactly the gap the extra shock above quantifies.

Source: FINRA Rule 4210

SPAN, conceptually

SPAN is the risk-based margin framework used for futures and futures options. It computes a scanning risk from a fixed set of joint price-and-volatility scenarios, then adds charges for calendar and inter-commodity structure and applies a floor for short option positions. It is a different construction from equity portfolio margin, not a variant of it.

Field	Value
Scanning risk	The largest loss across a fixed set of scenarios that move price and volatility jointly, including extreme-move scenarios taken at a fraction of their loss
Volatility is shocked	Unlike the equity portfolio-margin grid, the scenario set includes volatility up and volatility down at each price shock
Intra-commodity spread charge	An add-on for calendar structure, because offsetting positions in different months are not perfectly correlated
Inter-commodity credit	A reduction for recognised offsets between related products
Short option minimum	A floor per short option, so a far out-of-the-money short cannot carry a near-zero requirement
Worked	Illustrating why the volatility dimension changes the answer, using the same ten short 100-strike straddles and the same plus and minus 15 percent price range. Price-only worst loss: 8,647.82. Repeating the grid with volatility raised from 0.20 to 0.30 at every price point: worst loss 10,689.87, a factor of 1.2361. The volatility dimension adds 2,042.05 to the requirement on this position, which is 23.6 percent - and the position is short volatility, which is exactly the exposure a price-only grid cannot see

• The worked figures above are an illustration of the volatility-shock principle computed from this site's own reference inputs. They are not SPAN parameters, and SPAN's actual scenario weights, ranges and floors are set per product by the clearinghouse.
• Because SPAN shocks volatility, a short-option book is charged for the exposure that a price-only grid understates. That is the single most consequential structural difference between the two frameworks.
• The short option minimum exists because scanning risk on a deep out-of-the-money short can round to nearly nothing, while the position can still be assigned. It is a floor against the model, not a component of it.

Source: CME SPAN methodology

The capital-efficiency ratio between a defined-risk spread and its naked equivalent

A naked short option carries a higher return on committed capital than the spread built around it, and a far higher loss per dollar of capital committed. Both ratios are computable at entry from the same three numbers, and quoting either one alone is incomplete.

Field	Value
Formula	RoC = MaxProfit/BPR; Loss per dollar of capital = MaxLoss/BPR; Capital-efficiency ratio = RoC_naked/RoC_spread
Credit vertical	BPR = (W - C)*multiplier, and MaxLoss equals BPR, so loss per dollar of capital is exactly 1.00
Naked short put	BPR = (P + max(0.20*U - OTM, 0.10*K))*multiplier, and MaxLoss = (K - P)*multiplier, which is far larger
Both ratios needed	RoC alone favours the naked position; loss per dollar of capital alone favours the spread. They are the same trade seen from two sides
Worked	Underlying at 100. A 90/95 bull put spread collected for 1.15: BPR = (5.00 minus 1.15)*100 = 385.00, maximum profit 115.00, RoC 29.87 percent, maximum loss 385.00, loss per dollar of capital 1.0000. The naked 95 put alone collected for 2.05: BPR = (2.05 plus 15.00)*100 = 1,705.00, maximum profit 205.00, RoC 12.02 percent, maximum loss 9,295.00, loss per dollar of capital 5.4516. So the spread has 2.48 times the return on capital and the naked has 24.14 times the maximum loss, on 4.43 times the capital. The naked position risks 5.45 dollars per dollar committed and the spread risks exactly 1.00

• At these Regulation T figures the spread has the higher return on capital as well as the lower loss, because the 20-percent uncovered charge is large relative to the credit. That ordering is not universal and flips under portfolio margin, where the naked requirement can fall below the spread's.
• Loss per dollar of capital is the number the requirement itself is hiding. A defined-risk structure is the only case where it is exactly one, and that is the entire meaning of defined risk in capital terms.
• Comparing two structures on return on capital alone is comparing numerators while ignoring that the denominators are computed by different formulas from different quantities.

Source: Reg T / 12 CFR 220; FINRA Rule 4210

Assignment cascade arithmetic

Assignment replaces an option requirement with a stock requirement, and the stock requirement is computed on the full notional. When the option requirement was a small percentage of the strike, the substitution creates an immediate deficiency, and the deficiency is computable before the assignment happens.

Field	Value
Formula	Deficiency = InitialStockRequirement - (PreAssignmentRequirement + CreditReceived), with InitialStockRequirement = 0.50*K*shares under the Reg T baseline
Pre-assignment	An uncovered put requirement, a small multiple of the premium
Post-assignment	A long stock position at the strike, requiring 50 percent initial and 25 percent maintenance under the FINRA baseline
Cash movement	The full strike times shares leaves the account on assignment, regardless of the margin treatment
Scaling	Linear in contracts, so a position sized to the option requirement is over-sized by the same factor for the stock requirement
Worked	One short 95 put sold for 2.40 with the underlying at 100. Regulation T uncovered requirement = (2.40 plus max(20.00 minus 5.00, 9.50))*100 = 1,740.00. On assignment the account buys 100 shares at 95, a cash movement of 9,500.00. The Reg T initial requirement on that stock is 0.50*9,500.00 = 4,750.00 and maintenance is 0.25 of market value, which at S = 90 is 2,250.00. An account that held only the 1,740.00 requirement plus the 240.00 credit has 1,980.00 of equity against a 4,750.00 initial figure - a deficiency of 2,770.00, which is 11.5 times the credit collected. At ten contracts the numbers are 1,000 shares, 95,000.00 of cash and 47,500.00 of initial requirement against 19,800.00 of equity

• The deficiency is 11.5 times the credit collected in the worked case. The position was never sized against the stock requirement, and the assignment does not ask.
• A cash-secured put has no cascade, because the cash was already set aside at the strike. The cascade is entirely a consequence of margining the put rather than securing it.
• The cascade is worst on the day of assignment and resolves as soon as the stock is sold, so its cost is a forced liquidation at whatever price exists that morning rather than a permanent requirement.

Source: Reg T / 12 CFR 220; FINRA Rule 4210