Options Buying Power: What It Means and What It

Buying-power reduction

• Opening a short option can reduce available buying power by an amount determined by the account type and broker methodology.
• That amount can be far smaller than the option's underlying assignment value.

Requirements change

• Margin requirements are dynamic.
• Falling prices, rising volatility, concentration and changing correlations can cause requirements to increase.

Why buffers matter

• Using nearly all available buying power leaves little room for volatility expansion or adverse movement.
• A liquidity buffer gives the portfolio room to absorb stress and manage positions deliberately.

Better question

• Instead of asking 'How much can I trade?', ask 'How much stress can this portfolio absorb without forcing me to act?'

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