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When I naked-call (short) cash-settlement options, like VIX, the margin requirement is very high.

I tried some spread strategies to protect (e.g., buy same-expiration call at a higher strike), but the margin requirement (using Interactive Broker) is still very high (at least 20% of the underlying asset value).

Is there any way to reduce the margin requirement?

E.g., a covered call for cash-settlement options; or some other strategies.

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The Federal Reserve Board sets margin requirements via Reg T. For narrow based index options such as the VIX, it's:

  • 100% of option proceeds plus 20% of underlying security/index value less out-of-the-money amount, if any, to a minimum for calls of option proceeds plus 10% of the underlying security/index value, and a minimum for puts of option proceeds plus 10% of the put’s exercise price.

In approximation, it's about 20% (brokers can require more). There's no way around that.

A covered call would make no sense because here because there's no underlying equity for the VIX and even if there was, equity margin is 50%.

There might be something that you could do to lower your margin with futures but that's above my pay grade. And, it completely alters your strategy.

Buying an ITM call also changes the entire dynamic, creating a vertical (or diagonal) with a completely different risk/reward. It doesn't make sense to me to alter a strategy completely for the sake of margin.

Buying a cheap OTM call might be an alternative but there's a trade off between cost and margin. The further OTM it is, the cheaper it is but the higher the margin (difference in strikes less credit received). You'd have to run the numbers to see if the margin is reduced enough by buying protection. Protection is good but not if you don't want it. Then, it would be tantamount to throwing away that long premium, well, at least until the VIX bites you.

  • What does R/R mean? Could you explain what kind of futures strategy do you recommend? It seems for naked futures shorting, if the VIX strikes at some point, it's easier to have a margin call (although the VIX futures can hardly reach over $25). – I Wonder Nov 20 '19 at 9:04
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    R/R is risk/reward. I'm not recommending any sort of futures strategy. Securities margin is 50% whereas futures margin is much lower, typically in the 5-10% area. I'm suggesting that it makes no sense to select the strategy based on the margin. For example, if you're an investor and you want to acquire a stock at a lower price for B&H, you sell a short put. You don't throw away money on a long put, creating a vertical (lower margin) unless you want to limit risk (a trader's outlook). Also, look into portfolio margin. Some combination of options and underlying requires less margin. – Bob Baerker Nov 20 '19 at 14:08

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