How Is the Margin for a Written Option Calculated?

The margin for a written (short) option is calculated to cover the worst-case potential loss. Since the seller's loss is theoretically unlimited for a naked short call or substantial for a short put, the margin is usually the premium received plus an amount calculated based on the option's moneyness, the underlying asset's volatility, and the position's risk profile.

It must be sufficient to cover the loss if the underlying price moves adversely by a defined stress test amount.