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.
Glossar
Stress Test
Simulation ⎊ A stress test is a simulation technique used to evaluate the resilience of a financial institution or portfolio under extreme, adverse market conditions.
Written Option
Position ⎊ A Written Option signifies the seller's side of an options contract, obligating the writer to fulfill the terms if the buyer exercises the right.
Option Position
Leverage ⎊ An option position, within cryptocurrency derivatives, represents a contractual agreement conferring the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specified date.
Naked Short Call
Definition ⎊ ⎊ Naked Short Call describes the speculative derivative strategy where a trader sells a call option without owning the underlying cryptocurrency asset or holding a corresponding short position to cover potential assignment.