Puts on margin: same promise, smaller deposit

A cash-secured put and a margin put are the same contract. The obligation, the premium, the assignment, the worst case: identical. The one difference is what the broker holds while you're short, the full purchase price or a fraction of it. That single difference changes how many contracts fit, and how many fit is what decides whether the position survives.

The requirement

Stock at $50, short $45 put, $1.20 premium, 30 days. Cash-secured, the broker sets aside $4,500. On standard margin, the initial requirement for an uncovered equity put is typically the premium plus the greater of two figures: 20% of the stock's value minus the amount the put is out of the money, or 10% of the strike. Here, 20% of $50 is $10, minus the $5 out of the money is $5; 10% of $45 is $4.50; take the $5, add the $1.20 premium, and the requirement is $6.20 per share, $620 for the contract. Brokers can and do set house requirements higher, and portfolio-margin accounts compute it differently, but the shape is the same: a small fraction of the notional.

What the smaller deposit changes

The return on collateral. $120 on $4,500 is 2.7% for the month; $120 on $620 is 19%. Same trade, same $120. The higher figure isn't more profit; it's the same profit divided by a smaller number the broker chose. It looks like leverage because it is.

What it doesn't change is the worst case: the stock goes to zero and you lose $4,380 per contract. Nor does it change assignment. You're delivered 100 shares at $45 and debited $4,500, and if the account holds $620, you're now borrowing $3,880 at margin interest to hold stock you didn't budget for.

The requirement moves against you

The margin requirement is recalculated every day. As the stock falls toward the strike, the out-of-the-money amount shrinks and the option's price rises, so the requirement grows. At $45, with the put worth $3, it's 20% of $45 plus $3, about $1,200. At $40 it's higher still. The deposit is smallest when the trade is comfortable and largest when it isn't. If the account can't meet the new figure the broker issues a margin call and, if it isn't met, closes positions at the worst prices of the trade, without your input. In a broad selloff brokers also raise house requirements across the board, so the call arrives on every position at once.

How sizing goes wrong

An account with $10,000 can hold two cash-secured $45 puts. On margin it can hold sixteen by the initial requirement. Sixteen contracts is $72,000 of obligation on a $10,000 account. A 20% drop in the stock costs on the order of $7,000 in mark-to-market and lifts the requirement past $20,000, on an account that started with ten. The trade was never sixteen contracts. It was one $72,000 short position dressed as sixteen $620 deposits.

The way to use it

Size margin puts by the notional you could accept being assigned, exactly as if they were cash-secured, and keep the gap between that and the margin requirement as cash in the account. The margin then does one useful thing: it lets you hold that buffer in a money-market fund or short-term Treasuries instead of tying it up as idle collateral. Used that way, margin is a mild efficiency. Used to multiply the contract count, it converts a strategy that loses occasionally into one that ends.