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Key Takeaways
- Buying power reduction is the before-and-after change in the broker’s available buying-power balance.
- Each short-option trade carries three numbers, the premium collected, the margin it ties up and its maximum loss: $200, $1,700 and $9,300 for the example’s 95 put.
- The example’s uncovered 95 put has a $1,700 initial strategy-based margin requirement and $9,300 maximum expiration loss.
- A 95/90 put credit spread entered for $1.50 has $350 maximum expiration loss per standard spread.
- The broker’s order preview shows the buying-power impact and the payoff model shows the profit and loss, so size a trade with both.
- Cboe provides 75% margin treatment for eligible listed long options with more than nine months remaining; the broker applies its account rules.
What is buying power reduction (BPR)?
Buying power reduction (BPR) is the drop in a broker's available trading-capacity balance caused by an order. It equals the account’s available buying power before the trade minus the amount available after it. The order preview connects the proposed contracts and quantity to the account’s resulting balance.
Every short-option order carries three numbers: the entry cash flow, the margin requirement and the maximum loss. The opening premium lands in the account’s cash, and the short option stays on the books as a liability against it.
Formula
Buying power reduction = available buying power before order − available buying power after order. Example short-put initial margin = 100 × [premium + max(20% × stock price − out-of-the-money amount, 10% × put strike)]- The formula is Cboe’s strategy-based initial margin minimum for one uncovered equity put; a broker’s house requirement meets or exceeds it.
- For the maintenance calculation, use the current option market value in place of the original premium.
- Use the account’s complete positions, house rules and balance definitions to determine the broker-displayed buying-power change.
- For the same-expiration 95/90 put spread with $1.50 entry credit, maximum expiration loss is (5 − 1.50) × 100 = $350.
How is an uncovered put’s strategy-based margin calculated?
XYZ trades at $100 and a trader sells one naked 95-strike put for $2.00 per share in a Regulation T margin account. The put is $5 out of the money.
- Stock $100; put strike $95; entry premium $2; standard multiplier 100
- 20% calculation: $200 + $2,000 − $500 = $1,700
- 10% strike floor: $200 + $950 = $1,150
- Initial strategy-based margin requirement: max($1,700, $1,150) = $1,700
- Maximum expiration loss at stock zero: ($95 − $2) × 100 = $9,300
- Buying power reduction = available buying power before the order − after it, from the broker’s order preview
The short put ties up a $1,700 initial margin requirement against a $9,300 maximum expiration loss, so size it from the loss. Adding a long 90 put and entering the 95/90 spread for $1.50 cuts maximum expiration loss to $350.
Under the stated Cboe equity-option initial margin formula, the first calculation is $200 plus 20% of $10,000 minus $500, giving $1,700. The put floor is $200 plus 10% of $9,500, giving $1,150. The larger requirement is $1,700.
That is the initial requirement, and the broker’s order preview shows the buying-power change after its house rules. For maintenance, the option’s current market value replaces the original premium in the requirement.
Buying power reduction vs maximum loss
The short 95 put has $9,300 maximum expiration loss if the stock reaches zero: $9,500 strike payment minus the $200 premium. The same option payoff applies whether the position is funded through margin or secured with cash.
A 95/90 put credit spread entered for $1.50 receives $150 and has $350 maximum expiration loss. A long option purchased for $3 costs $300 and has $300 maximum option loss. Compare those dollar outcomes with the account funding required for each structure.
Eligible listed long equity and equity-index options with more than nine months remaining have 75% margin treatment under Cboe’s stated minimum rules. Long options at nine months or less are paid in full. The broker applies its house and account requirements to the order.
How traders use buying power reduction
The broker’s margin tool calculates buying-power impact for the account’s actual positions, and the options profit calculator compares payoff, entry price and dollar outcomes. Select the quantity using both the planned payoff and the capital committed.
After a leg closes, an option is assigned or the underlying moves, review the complete resulting position and updated account balances.
Limitations of buying power reduction
- Size from the maximum loss. The short 95 put ties up $1,700 of initial margin and loses up to $9,300 at expiration.
- Recheck the requirement after entry. The option’s market value, the underlying price, remaining positions and margin rules move it, and assignment or a closed leg changes the position being funded.
- Price the order in the account where it trades. Brokers apply house requirements, position offsets and their own balance definitions, and portfolio margin uses stress scenarios instead of strategy-based formulas.
- Treat the $1,700 as the floor. Cboe’s minimum for one uncovered equity put sets it, and a broker’s house requirement meets or exceeds it.
Bottom line
Buying power reduction shows how much of an account’s trading capacity an order ties up, measured beside the premium received and the maximum loss. Take the exact figure from the broker’s order preview, size the trade from the maximum loss as well as the capital committed, and recheck balances as the position changes.
Clear answers
Frequently Asked Questions
Sources and Further Reading
How entries are sourced, calculated and updated: editorial methodology.