When trading stocks, options, or futures, you have to have the appropriate amount of cash available in your account to open a position. The term "Buying Power" refers to the amount of equity in your account that is readily available to allocate to new positions. Stock buying power and option buying power differ, so let's start with stock buying power.
Depending on the type of account you have, your stock and option buying power may differ. However, in a margin account with 2: Here's a table that quickly demonstrates the required stock buying power for certain stock purchases based on the account type:. In some margin accounts, the stock buying power can reach 4x the available cash in the account for intraday stock trading. As a result, traders can reach 4: Unlike stock buying power, options cannot be purchased on margin.
As a result, option buying power is equal to the amount of cash in your account that is readily available to allocate to option positions. When you purchase an option, the most you can lose is the value of that option Option Price x Option Contract Multiplier.
So, you'll always have to have enough cash in your account to cover the entire cost of an option position. The same is true for option spreads you purchase. Here's an AAPL put debit spread:. You know that to buy an option you need to have enough available cash in your account to cover the maximum loss and commissions associated with an option purchase.
How much do you need in your account to sell options? When it comes to limited risk spreads, you'll need option buying power equal to the maximum loss of the spread, plus commissions. Here's an example of the buying power required to sell a put spread in NFLX:. What about option positions with "unlimited" loss potential? Fortunately, you won't have to ever make these calculations, as your brokerage firm will take care of the calculations for you! For limited risk option positions such as option spreads or outright option purchases , your buying power requirement will not change over the duration of the trade.
However, for uncovered option positions short calls and short puts , the buying power requirement will change as the stock price, option premium, and out-of-the-money amount change. As a result, it's always a good idea to never "max out" your account's option buying power, as an increase in the buying power requirement can lead to your brokerage firm forcing you out of positions if you can no longer meet the capital requirement.
Hopefully, this post has helped you learn about the required costs associated with opening new stock and option positions in your trading account cash or regular margin. To quickly summarize what this post has covered, here are the key points to remember: Stock buying power is the amount of equity in your account available for stock purchases.
In margin accounts, stock buying power is typically 2x the cash available in your account, as margin accounts are allowed 2: For limited risk option positions, the required option buying power is equal to the position's maximum loss potential, plus commissions. For "uncovered" option positions selling calls or selling puts , the option buying power required to enter the position is commonly the largest value of three calculations, which your brokerage firm calculates for you.
Always keep a portion of your account in cash to allow for changes in the buying power requirement for your option positions. Stock Buying Power Depending on the type of account you have, your stock and option buying power may differ. Here's a table that quickly demonstrates the required stock buying power for certain stock purchases based on the account type:More...