What Is ‘Short Selling’ an Option, and Why Does It Require Margin?

Short selling an option, or 'writing' it, means selling a contract you do not own, thereby taking on the obligation to buy or sell the underlying asset if the option is exercised. Since the potential loss for the seller is theoretically unlimited (for a call) or substantial (for a put), the clearing house requires the seller to post margin.

This margin acts as collateral to ensure the seller can meet their obligation if the option is exercised against them.