Option contracts (this question also applies to futures) on exchanges are required, legally, to at least put an option margin of 50% to cover some collateral. However, if things go as expected for the contract buyer and they execute the deal of the contract, how is the seller enforced to pay the rest of the collateral?
For example, If I buy a call option for 100 shares of N at strike $20.00 where N is currently $10, and execute it when N is $30, how can I be sure that the person at the other end of the contract can actually sell me this security at the original price? From my understanding, their original margin was 50 shares of N at $10. Is it possible for the underlying stock to be used as collateral?
What actually happens if the contract holder refuses to perform his obligations?
I suppose this same concept can be applied to a futures contract, although the situation is exaggerated since magnitudes of leverage can be imposed.