Futures and options trading definition
Their net margin would be that difference minus the costs involved of making the trades. Profit margin can be expressed as either a percentage or an actual amount.
You may hear people refer to buying stocks on margin, and this is basically borrowing money from your broker to buy more stocks. If you have a margin account with your stock broker, then you will be able to buy more stocks worth more money than you actually have in your account.
If you do buy stocks in this manner and they go down in value, then you may be subject to a margin call, which means you must add more funds into your account to reduce your borrowings. Margin is essentially a loan from your broker and you will be liable for interest on that loan. The idea of buying stocks using this technique is that the profits you can make from buying the additional stocks should be greater than the cost of borrowing the money.
You can also use margin in stock trading to short sell stocks. Margin in futures trading is different from in stock trading; it's an amount of money that you must put into your brokerage account in order to fulfill any obligations that you may incur through trading futures contracts. This is required because, if a futures trade goes wrong for you, your broker needs money on hand to be able to cover your losses.
Your position on futures contracts is updated at the end of the day, and you may be required to add additional funds to your account if your position is moving against you.
The first sum of money you put in your account to cover your position is known as the initial margin, and any subsequent funds you have to add is known as the maintenance margin. In options trading, margin is very similar to what it means in futures trading because it's also an amount of money that you must put into your account with your broker. This money is required when you write contracts, to cover any potential liability you may incur.
This is because whenever you write contracts you are essentially exposed to unlimited risk. For example, when you write call options on an underlying stock you may be required to sell that stock to the holder of those contracts. If it was trading at a significantly higher price than the strike price of the contracts you had written, then you would stand to lose large sums of money. In order to ensure that you are able to cover that loss, you must have a certain amount of money in your trading account.
This allows brokers to limit their risk when they allow account holders to write options because when contracts are exercised and the writer of those contracts is unable to fulfill their obligations, it's the broker with whom they wrote them that is liable. Although there are guidelines set for brokers as to the level of margin they should take, it's actually down to the brokers themselves to decide.
Because of this, the funds required to write contracts may vary from one broker to another, and they may also vary depend on your trading level.
However, unlike the requirements when trading futures, the requirement is always set as a fixed percentage and it isn't a variable that can change depending on how the market performs. It's actually possible to write options contracts without the need for a margin, and there are a number of ways in which you can do this.
Essentially you need to have some alternative form of protection against any potential losses you might incur. For example, if you wrote call options on an underlying stock and you actually owned that underlying stock, then there would be no need for any margin. This is because if the underlying stock went up in value and the contracts were exercised you would be able to simply sell the holder of the contracts the stock that you already owned. Although you would obviously be selling the stock at a price below the market value, there is no direct cash loss involved when the contracts are exercised.
You could also write put options without the need for a margin if you held a short position on the relevant underlying security. What are the opportunities offered by Stock Futures? How are Stock Futures settled?
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