How is Amount Risked Calculated?

Calculating 'Amount Risked' for Option Strategies

If you are ever in doubt about the margin requirements, The Options Clearing Corporation publishes a very handy options margin calculator here.

Options Margin Calculator

In an effort to help save time, here are the results:

Naked Short Put
Initial margin requirement:

• 100% of option proceeds, plus 20% of underlying security value less out-of-the-money amount, if any
• minimum requirement is option proceeds plus 10% of the put's aggregate exercise price (number of contracts x exercise price x $100)
• proceeds received from sale of puts(s) may be applied to the initial margin requirement after position is established, ongoing maintenance margin requirement applies, and an increase (or decrease) in the margin required is possible

What Does the CMLviz Back-tester Use?
We use the most conservative value:
100% of option proceeds, plus 20% of underlying security value less out-of-the-money amount, if any

Here's an Example
Position
Short 1 Mar 100 puts(s) at $5.00
Underlying stock at $100.00
Put is at-the-money

Initial Margin
Margin Requirement (Amount Risked): $2,500.00
Proceeds from sale of short put(s): $500.00
Margin call (SMA debit): $2,000.00

Naked Short Call
Initial margin requirement:

• 100% of option proceeds, plus 20% of underlying security value less out-of-the-money amount, if any
• minimum requirement is option proceeds plus 10% of the underlying security value
• proceeds received from sale of call(s) may be applied to the initial margin requirement after position is established, ongoing maintenance margin requirement applies, and an increase (or decrease) in the margin required is possible

What Does the CMLviz Back-tester Use?
Again, we use the most conservative value:
100% of option proceeds, plus 20% of underlying security value less out-of-the-money amount, if any

**Here's an Example
Position **
Short 1 Mar 100 call(s) at $5.00
Underlying stock at $100.00
Call is at-the-money

Initial Margin
Margin Requirement (Amount Risked): $2,500.00
Proceeds from sale of short call(s): $500.00
Margin call (SMA debit): $2,000.00

Selling Spreads
We take the minimum of either the naked short option risked or the max loss of the spread.

Buying Options or Option Spreads
The amount risked is the cost of the option or the spread.

Can you explain more about short straddle and short strangle risk?
In the most basic sense, the straddle and strangle risk calc is simply taking the put risk and adding it to the call risk. Where it gets more invovled, is that what the TradeMachine® ultimately displays is the "max risked". This figure tracks how risk changes over the course of the entire backtest, and it takes into account the running cash balance, commissions, etc.

If, for example, a certain out of the money (say 25 delta) short call were being sold over and over, and the stock never moved, then the cash balance of the backtest would be slowly building. So, if this option required $1000 of margin (aka $1000 of risk) the first time, and the system collected $100 for selling it, for a net risk of $900, each subsequent rollover the risk would go down by $100 as the trader's net cash balance builds.

When there is both a short call and a short put, in most circumstances (other than trading "guts" in the money strangles) at least one of these options expires worthless and has a positive effect on the net cash. This, in turn, affects the risk, by increasing the cash, and reducing the risk from this point forward.

The reverse is also true. If the trader loses $5000 on the first trade, the risk for the overall backtest is now $5000 higher, and so the max risked calculation at the end will reflect this much higher risk. So, even if the end result is very positive, the risk along the way may have been substantial.

Here is a long list of more step by step examples: Risk Examples for SBUX