Why margin exists
When you buy an option, you pay the premium and the transaction is complete. Whatever happens next, you cannot lose more than what you have already handed over, so nobody needs collateral from you.
Writing is different. You receive premium up front in exchange for an obligation that stays open — potentially to deliver shares you do not own, or to buy shares at a price well above the market. The clearing house has guaranteed that obligation to the other side of the trade, so it holds collateral against the possibility that you cannot meet it.
That collateral is margin. It is not a fee and it is not a cost of trading — it is your own money held against an open commitment, returned when the commitment ends. What makes it demanding in practice is that the required amount is recalculated daily and can rise without you doing anything.
Two components: premium margin and risk margin
| Component | Covers | Basis |
|---|---|---|
| Premium margin | The cost of closing the position at today's market prices. | Current mark-to-market value, revalued daily. |
| Risk margin | The further loss that could occur before the position can be closed. | Worst outcome across a range of price and volatility scenarios. |
The second component is where SPAN comes in. Rather than setting a flat charge per contract, SPAN revalues the whole portfolio under a set of hypothetical shifts — the underlying moving up and down by varying amounts, volatility rising and falling — and takes the worst plausible result as the requirement.
Because it works on the portfolio rather than each contract in isolation, genuinely offsetting positions can require far less margin than the sum of their parts. A defined-risk spread is not margined as though both legs could lose simultaneously, because they cannot.
What changes the number
Four things that raise a margin obligation
The requirement is recalculated after each trading day. These are the changes that most often increase it on a position the holder has not touched.
- 01
The underlying moves against the position
Risk margin is recalculated against a range of hypothetical price moves. A move toward your short strike raises the projected loss and the margin with it.
- 02
Implied volatility rises
The scenarios used to calculate risk margin include volatility shifts. Rising IV widens the plausible range of outcomes, which increases the requirement even if the underlying price has not moved.
- 03
The position moves closer to expiry
As time value decays, the mark-to-market value of a written position changes, and premium margin is revalued daily to reflect it.
- 04
A leg of a combination is closed
Offsetting positions can reduce the total requirement. Closing one leg can remove that offset and increase the margin on what remains, sometimes substantially.
The failure mode worth understanding
The uncomfortable case is not a single position going wrong. It is a market-wide move that pushes several positions the same way at once while simultaneously lifting implied volatility. Both inputs to the risk calculation deteriorate together, and the total requirement can rise sharply across a portfolio in one session.
This is why margin is worth modelling before it is charged rather than after. Knowing what a portfolio would require under an adverse move is a different exercise from knowing what it requires today.
See what-if margin analysis →Eligibility to write options that generate a margin obligation is not automatic. It depends on account approval, and the conditions are set out in your broker's disclosure documents.