Do You Need A Margin Account To Trade Options?

When opening an options account with your broker, many types of accounts will be available to you. Should you open a cash, margin, or IRA account? In this article, we will cover our preferred account type for most traders.

Pros and Cons of Different Account Types

There are pros and cons with each account type mentioned above. We are making the recommendation based on what will set you up best as a trader. Other features like tax benefits will be a conversation that you will want to have with your accountant. 

Why We Recommend a Margin Account for Options Trading

We recommend opening a margin account for your options trading as it will give you the most flexibility to use different strategies. This will allow you to use strategies like long calls and long puts as well as vertical spreads.

Understanding the Term ‘Margin’ and Its Implications

Most traders get intimidated when they hear the term margin as it could lead to large losses. We only teach our traders to use risk-defined options strategies so the margin account does not come with extreme risk.

What Is Margin?

Margin is essentially a loan provided by the broker to the trader. This allows the trader to leverage their position and potentially earn larger profits. However, it’s important to note that while margin can amplify profits, it can also amplify losses. If a trade goes against the trader’s position, they may end up losing more than their initial investment. This is why trading on margin is considered high-risk and is not suitable for all investors

Minimum Account Size for Opening a Margin Account

The minimum account size required to open a margin account can range from $2000-$3500. Our preferred broker TastyTrade requires a $2000 minimum account size to open a margin account. 

Pattern Day Trading Rules for Accounts Under $25k

If your account is less than $25k you will be subject to the pattern day trading rules. With an account under $25k, you will only be able to take 3-day trades in 5 days. Once you hit that 3rd day trade you will be limited to closing trades only. A day trade is a position that is opened and closed during the same trading day. 

Cash Accounts: A Workaround to Pattern Day Trading Rules

A workaround to the pattern day trading rule is to open a cash account. Cash accounts are not subject to the pattern day trading rules. You can take as many day trades as you want as long as you have the capital in your account. 

Most brokers require as little as $100 as a minimum starting account size when opening a cash account. We still recommend starting with $3500 at a minimum with a cash account as it will allow you to use better risk rules.

The negative to a cash account is you will be limited to trading long calls and long puts only. You won’t be able to trade vertical spreads. 

Conclusion

As you can see there are different account types that you can utilize when trading options. The margin and cash accounts will be the best choices for the widest range of retail options traders.