Margin Account Vs. Cash Account

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http://optionalpha.com - If you're feeling confused about the difference between cash and margin requirements for option trading in this video will help explain each to you.

In general cash accounts (also your traditional IRA or retirement account) will require that for every contract you buy or sell you have the underlying cash available to cover that contract's risk.

With margin accounts, the cash or securities that are already in your account act as collateral for a line of credit that you can take out from your broker in order to buy or sell more of an underlying option. This reduces your initial capital requirement for most trades which is a good thing but also leaves you vulnerable to overexposure in using too much leverage.

It's not that leverage is a bad thing because it isn't. You just need to be aware of how it's calculated and how much risk you are willing to take for your portfolio size.

We highly recommend that you call your broker and discuss their particular differences in how they calculate margin requirements for different option or stock positions.

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- Kirk & The Option Alpha Team
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