John Jagerson

Trading Where You Think Prices Won't Go

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5. Margin

Selling a call means you have an obligation to cover losses that may occur if the trade moves against you. For example, if the market begins to rise, the call will gain in value and could become worth more than you sold it for. Most brokers or options dealers will require you to cover this trade with a margin requirement.

As a general rule of thumb, you are usually going to have to cover an options position with 20% of the notional value when trading exchange options, which is a leverage ratio of 5:1. Options offered by forex dealers usually have a much higher leverage ratio closer to spot leverage rates. If you are a very aggressive trader, working with an options dealer rather than a broker may be the best way to go.

Why do forex traders care if equities are in a bull market? Find out here.