When we discuss initial margin and maintenance requirements, we are talking about the amount of funds that your broker will require you to have in your account before placing a spread. Let’s take a look at one of our spreads in detail to help explain this requirement.

In May of 2007, we placed a 100-95 June Bull Put Spread on U.S. Steel (X). We sold 20 contracts at the $100 strike price and bought 20 contracts at the $95 strike price. In this trade, we took in a credit of $1,100.00 for the spread.

To figure the amount that your broker will require you to have in your account when placing this trade, we simply find the difference between the strike prices in the spread. In this case, it would be $100 - $95 = $5.

This is helpful to figure how many contracts you should be trading based on your account size. Once you find the cost per contract in the spread, you can figure the number of contracts that you want to trade per position.

In any type of trading, it is important for you to maintain come cash reserves. The last thing you want to do is incur a margin call. This is when your broker requires you to deposit additional funds or securities in order to bring your account up to a certain dollar amount.

In our type of trading, as long as you maintain the initial margin amount in your account, you should not have to worry about a margin call. This is often referred to as your Account Maintenance requirement.

However, if a spread has gone against you and the value of your account has dropped, this could be an issue for your next trades. This can be avoided by properly allocating your account. For more information on this, click on the “Figure Account Allocation” link on the “Resources” page.

In our 100-95 Bull Put Spread on U.S. Steel (X), the options expired worthless on the third Friday in June. In this case, we kept the credit of $1,100.00 that we took in when we entered the spread. If we leave it in our trading account, this amount will increase our Account Maintenance and allow us to trade more contracts in the future.

For members with larger accounts (usually $100,000 or more) there is a new option for margin accounts. Instead of using the points between the strike prices, some brokers will use a percentage of risk in the spread. This is usually a smaller amount and will allow you to hold more positions. It is best to contact your broker no matter what size your account is to confirm their margin and account maintenance requirements.