Friday Q&A...And A Big Announcement!

Friday Q&A Hello Smart Option Sellers! Here's the latest installment of the Friday Q&A. And make sure to read all the way to the bottom for a big announcement. Q: Hello Lee, I have a few questions: - What are the benefits of a Portfolio Margin account? Is it better to convert to it? - How to calculate the margin requirements after the stock drops? I know how to calculate it when I open a position but not when the stock moves. A: These are good questions, and ones I think all of us could benefit from. As many of you should know, when you sell a put option, your broker will require you to keep some funds aside as collateral - called the "margin requirement". Here at Smart Option Seller, we calculate our return-on-margin (ROM) by using a flat 20% margin requirement, which is based on the cost of buying the shares if assigned at expiration. This is sometimes a higher amount than most options brokers, so it gives us breathing room as the stock fluctuates. But, each broker sets their own levels and has their own formula for calculating it. And, the margin requirement could be higher or lower for some of you. This type of margin is called "Regulation T" (Reg T). There is also another type of margin called "portfolio margin", which is based off the whole make-up of all the securities in your portfolio, not piecemeal one-by-one. It basically conglomerates all your risk and then assigns the margin requirement. In some cases, portfolio margin will use less funds than Reg T, and sometimes not. You should be able to play around with each to see how it affects your portfolio. One drawback though - brok