Quick Answer
While an option is open, the buyer posts no margin (the premium paid is the maximum loss) and the writer must post performance-bond margin. After exercise and assignment, both sides hold futures positions and each must post futures margin subject to daily variation margin. The former buyer's obligation changes purely by exercising.
Margin works one way while the option is alive and a completely different way the instant it is exercised. The exam loves the switch that happens to the buyer.
Margin Before Exercise
While the option is still an option, the two sides are treated very differently.
- The option buyer (holder) posts no margin. The buyer pays the premium in full at purchase, and that premium is the buyer's maximum loss. Nothing more can be called from a long option holder.
- The option writer (grantor), who is short the option, must post performance-bond margin while the position is open, because the writer's risk is open-ended and is not covered by the premium collected. This margin is separate from, and on top of, the premium received.
Think of it this way: the buyer has already paid the full ticket price for a lottery ticket. The worst that happens is the ticket is worthless, so no one asks the buyer for more. The writer sold that ticket and is on the hook for whatever it pays out, so the clearinghouse makes the writer keep a deposit on file to guarantee they can cover it.
Exam Tip: Gotchas
- The option writer posts margin; the option buyer does not, while the option is open. The premium the buyer already paid is the buyer's entire exposure, so there is nothing more to secure. The writer's downside is open-ended, so the writer's margin is required and is not satisfied by the premium collected.
Margin After Exercise and Assignment
Once the option is exercised, both parties are ordinary futures traders, and futures margin rules take over.
- After exercise and assignment, both the new long and the new short hold futures positions, and each must post futures (performance-bond) margin on that position, just like any other futures trader.
- Both new futures positions are subject to daily variation margin: they are marked to market each session, so gains are collected and losses are called day by day.
- The former buyer, who had no margin obligation while holding the option, now holds a margined futures position and can face margin calls on it, a meaningful change in obligation triggered purely by exercising.
Margin Obligation by Stage
The clean way to hold this is to track each party across the two stages.
| Stage | Option buyer / holder | Option writer / grantor |
|---|---|---|
| Holding the option | No margin; premium paid in full is the max loss | Must post performance-bond margin (premium alone is not enough) |
| After exercise / assignment | Holds a futures position: must post futures margin, subject to daily variation margin | Holds the opposite futures position: must post futures margin, subject to daily variation margin |
Memory Aid: An option buyer pays once (the premium) and owes nothing more, until they exercise. Exercising trades the paid-up ticket for a live futures position, and live futures always carry margin.
Exam Tip: Gotchas
- A former option buyer who owed no margin now holds a margined futures position after exercising. The change is real: before exercise the holder's only exposure was the premium already paid, but after exercise they own futures and can be hit with variation-margin calls. Do not assume "the buyer never posts margin" carries past the moment of exercise.
- After exercise, both sides post futures margin, not just the writer. Exercise converts the option into futures for the holder and the assigned writer alike, so both are now subject to initial and daily variation margin on real positions.