Buying Power

Buying power is the total amount of capital available in your brokerage account to open new positions. It includes your cash balance plus any additional leverage provided by margin. For options traders, buying power determines how many contracts you can sell and how large your positions can be, since short options and spreads tie up buying power as collateral.

Why It Matters

Buying power is the practical constraint on everything you do as an options trader. You might see a perfect setup, but if you do not have enough buying power, you cannot put the trade on. More importantly, selling options — the backbone of income-oriented strategies — requires buying power as collateral, even when the actual cash risk may be much smaller.

Efficient use of buying power is what separates profitable traders from those who plateau. Tying up too much buying power in a single trade limits your ability to diversify or take advantage of new opportunities. Running too close to zero buying power puts you at risk of margin calls if positions move against you.

How It Works

Buying power calculation depends on your account type:

Cash account: Buying power equals your cash balance. You cannot use margin. Selling naked options is not allowed. You can sell covered calls and cash-secured puts only.

Reg T margin account: For stock, you get 2:1 leverage (you can buy $200,000 of stock with $100,000 in cash). For options, buying power is reduced by the margin requirement for each position. A short put spread with a $5 wide strike ties up $500 per contract minus the premium received.

Portfolio margin: Buying power is calculated based on the overall risk of your portfolio rather than fixed percentages. This typically results in 3x to 6x more buying power than Reg T, but requires a minimum of $125,000 and more sophisticated risk management.

How options use buying power:

• Long options (bought): Reduce buying power by the premium paid. No margin required.
• Defined-risk spreads: Reduce buying power by the max loss of the spread (width minus premium received).
• Naked options: Reduce buying power by the broker's margin formula, which is typically 20% of the underlying price minus the OTM amount, plus the premium.
• Covered calls: Use the stock position as collateral; no additional buying power needed.

Buying power effect (BPE): Most brokers show the BPE for each trade before you submit the order. This tells you exactly how much buying power will be consumed.

Quick Example

You have a $50,000 margin account with no open positions, giving you $50,000 in options buying power. You sell a $5-wide put spread on stock XYZ for $1.50 credit. The buying power reduction is $500 - $150 = $350 per contract. You sell 10 contracts, using $3,500 of buying power. Remaining: $46,500.

If you sold a naked put on a $100 stock instead, the buying power reduction might be $1,800 per contract — the same notional exposure requires far more capital without the defined-risk protection.