Can someone please clarify for me this quote from the NYMEX copper options specs page: "Margin Requirements Margins are required for open short options positions. The margin requirement for an options purchaser will never exceed the premium paid. " The second sentence is what troubles me most. Options buyers don't pay margin, only the premium. Thanks.
since optiosns arep purchased for cash there is no margin. So if u buy an option worth $400, that $400 is tkaen out of your account and that thing can go to zero and they won't bother u since they ( the clearing house) already got their $ up front.
Best to read an option primer before you sell options. Yes there is margin for short option positions. When you are short an option you collect premium. For that premium you grant the buyer the right to call or put physical (or futures?) to you. Your risk is unlimited because the market may move far from your striking price and you have to cover the difference. If you sold a Copper call 135 strike for 2 for example and copper rises to 147 (it could happen even in a single day if the markets return to the moves we saw in the 70's) you are obligated to sell to the buyer of the call copper at 135 (loss of 12 but you keep the premium -2, loss of 10) The options clearing association who is guaranteeing performance on option contracts wants to make sure that option sellers csn perform on the contracts and collects (or makes the broker put aside from your account) sums to cover the risk. Copper can get pretty wild. There have been a few celebrated cases where big corporate players dropped BILLIONS in the copper futures market. Sugar went at on time from 2 cents a pound to 46 cents a pound. Imagine yourself if you were short a long term call for .2 c per contract. You would have lost 100x that much. If you sold many many out of the money sugar calls at a fraction of a cent your losses would have been thousand fold. In the reverse if you sold out of the money puts on sugar when it was going to the moon at 46 you would have been soaked as it went back to 2c. In 1987 several brokers went belly up when the stock market collapsed and the margin from clients did not cover the catastrophic losses caused by out of the money put position. The clients usually walked and the brokers were keeping the bag,
Futures options are different from cash (e.g. stock) options !!! With FOPTs the purchaser does not pay the premium at buy time, instead he secures his later (expiry) option premium payment with margin.