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Premium Margin

Premium MarginSecurity deposit that an option writer pays to cover the potential loss that he would incur if the position were liquidated at the daily closing price. Premium margin is calculated on a daily basis.

Premium margin is calculated daily for all options whose option premium has been paid in full by the purchaser. If a change in the price of the underlying security results in an increase in the cost of liquidating the position, the option writer is obliged to deposit additional premium margin. The option holder is not required to put up margin because in purchasing the option he has acquired the right, and not the obligation, to exercise the option. The maximum risk for the option holder is the loss of the option premium.

Premium margin is not required for options on futures because the profits and losses that arise from these positions are netted on a daily basis.

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