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Stock buying power and option buyer power aren’t the most fun topics to discuss, but they are necessary to understand as a trader.
In this video, we’ll discuss stock buying power in cash accounts and margin accounts, as well as option buying power.
It’s quite simple. When buying any option positions or selling limited-risk option spreads, you need to have the position’s maximum loss potential in available option buying power to trade that position.
When selling naked options (short calls or short puts), the option buying power requirement is typically the greatest of three calculations, which your brokerage firm takes care of for you.
The most important takeaway from this video is that when selling naked option positions, it’s never a good idea to “max out” your account’s available buying power, as the margin requirement can increase as the stock price, out-of-the-money amount, and option premium change.
As a result, it’s possible that your margin requirement expands and you get forced out of your option position at the worst possible time.
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