How Does the Concept of “Margin” Apply to the Seller (Writer) of an Option?
An option writer, particularly of an uncovered option, must post margin to cover the potential loss, which can be substantial or unlimited. This margin acts as a performance bond to the clearing house or counterparty.
The margin is calculated based on the risk of the position and is subject to maintenance requirements. Margin protects the counterparty from default.
Glossar
Option Writer Collateral Needs
Obligation ⎊ Option writer collateral needs stem directly from the unlimited or substantial theoretical loss potential associated with selling naked call or put options.
Naked Option Writer
Exposure ⎊ A naked option writer, within cryptocurrency derivatives, assumes unlimited risk by selling options contracts without holding the underlying asset or a corresponding offsetting position.
Covered Call Writer Risk
Risk ⎊ Covered call writer risk primarily refers to the opportunity cost incurred when the underlying cryptocurrency asset appreciates significantly above the option's strike price before expiration.
Options Writer Challenges
Exposure ⎊ The primary challenge for an options writer involves managing the potentially unlimited or substantial downside exposure associated with the written contract, especially in highly volatile crypto assets.
Crypto Option Seller Tactics
Strategy ⎊ Crypto option sellers primarily employ strategies designed to profit from time decay and a decrease in implied volatility.
Futures and Options Margin
Requirement ⎊ Futures and options margin represents the good-faith deposit demanded by a clearing house or exchange to cover potential losses on leveraged derivatives positions.
Call Writer Risk
Exposure ⎊ The core of call writer risk in cryptocurrency derivatives stems from the obligation to sell an asset at a predetermined price (the strike price) regardless of its subsequent market value.
Option Writer Profit
Premium Receipt ⎊ Option writer profit, within cryptocurrency derivatives, represents the initial capital inflow secured by selling an option contract.
Buyer Vs Seller Margin
Concept ⎊ The differentiation between buyer and seller margin quantifies the capital allocation required to sustain long or short derivative positions, respectively, within a cryptocurrency or options framework.
Option Seller Complexity
Exposure ⎊ The writer assumes the counterparty risk associated with the option holder exercising their right, meaning the writer is obligated to fulfill the contract terms regardless of market direction.