CBOE Rules Related to Margin Accounts

Instructor: Yusuf Abdullah

Yusuf has taught Science and Mathematics at school level and Finance and Economics at University level. He has recently earned his Ph.D in Financial Econometrics.

Chapter 10 of the CBOE rule book deals with the rules related to margin accounts for options trading. Learn about margin requirements, prohibited trade activities, time rules related to margin requirements, and record retention.

Margin Trading

Rob has been advised about the benefits and risks of margin trading by his financial advisor, Jill. She defines margin trading as an investment made by borrowing. Usually, the borrowing comes from a broker or a bank. Margin trading may create great profits but can also cause massive losses. The risks are high and therefore, a number of rules have been enacted, such as Regulation T. Regulation T determines the maximum amount of margin for different types of trades and assets.

CBOE Margin Rules

Jill informs Rob that the rules for margin trading in options have been established by the Chicago Board of Options Exchange (CBOE) and are significantly exhaustive. The important sections of the rule include:

General Rule

The general rule prohibits any trader to carry out a trade without meeting proper margin requirements as laid down by CBOE rules or Regulation T of the Federal Reserve.

Time Margin Must Be Obtained

The initial margin and the maintenance margin are to be received expeditiously, within one day (payment period). However, in some circumstances, payment for the maintenance margin can be extended up to 15 days.

Margin Requirement

The rules for different types of options are summarized in the table:

Option type Initial margin Maintenance margin
Long Call or Long Put less than 9 months 100% None
Long Call or Long Put more than 9 months 75% (both listed and OTC) 75% (both listed and OTC)
Short Call (broad index) 100% of option value + 15% * (Index Value - out of the money amount)
or
10% of index value
Same as initial margin requirements
Short Put (broad index) 100% of option value + 15% * (Index Value - out of the money amount)
or
10% of put exercise price
Same as initial margin requirements
Short Call (narrow based index) 100% of option value + 20% * (Index Value - out of the money amount)
or
10% of index value
Same as initial margin requirements
Short Put (narrow based index) 100% of option value + 20% * (Index Value - out of the money amount)
or
10% of put exercise price
Same as initial margin requirements
Short Call (interest rate option) 100% of option value + 10% * (Index Value - out of the money amount)
or
5% of index value
Same as initial margin requirements
Short Put (interest rate option) 100% of option value + 10% * (Index Value - out of the money amount)
or
5% of put exercise price
Same as initial margin requirements

Portfolio Margin Requirements

The initial and maintenance margin required is the greater of:

  • The largest theoretical loss as calculated based on volatility and other macroeconomic factors as per the CBOE and SEC rules.

OR

  • $0.375 * multiplier (but not exceeding market value)

The portfolio would have to be marked to market each day.

Determination of Value for Margin Purposes

The position used to determine the margin shall be the current market value of active securities except for securities futures contracts. Futures contracts would have no value for margin purposes. A higher substantial valuation might be required when the securities are volatile or illiquid.

'When Issued' and 'When Distributed' Securities

These are terms Rob does not understand. Jill defines when issued securities as the ones who have not yet been issued but have been authorized. When distributed securities have been authorized and issued but have not been yet distributed. The margin requirement for when-issued securities would be the same as the securities have been issued. The securities have to be marked to market each day. The contracts on such securities, however, do not require to be marked to market each day.

Guaranteed Accounts

In case an account guarantees another account, both the accounts should be combined and the margin requirement should be based on the net position of both these accounts. Jill informs Rob that guaranteed accounts are those accounts for which the guarantor provides the permission in writing.

Meeting Margin Calls By Liquidation Prohibited

This requirement relates to the broker-dealer and prohibits them from allowing customers to deposit margin money (both initial or maintenance margin) by liquidating the securities in the margin account or by liquidating other securities.

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