Cash vs Margin Accounts
The difference between cash and margin accounts for options trading.
A cash account requires you to pay for all purchases with settled funds and does not allow borrowing. A margin account lets you borrow money from your broker to increase your buying power, enables short selling, and is required for most advanced options strategies. The choice between them determines your available strategies, capital efficiency, and risk exposure.
Why It Matters
This is one of the first decisions you make as an options trader, and it has lasting implications. A cash account limits you to buying options and selling covered calls or cash-secured puts — strategies that require full capital backing. A margin account opens up spreads, iron condors, naked selling, and other strategies that use leverage.
Most active options traders upgrade to a margin account because the capital efficiency gains are significant. Selling a $5-wide credit spread in a margin account ties up $500. Selling a cash-secured put at the same strike in a cash account ties up $5,000-$10,000. Same directional bet, vastly different capital requirements.
How It Works
Cash account rules:
- All purchases must be paid with settled funds
- No borrowing from the broker
- Options strategies: Long calls/puts, covered calls, cash-secured puts
- Settlement takes T+1 for stocks (one business day). Options settle T+1 as well.
- Good faith violations occur if you trade with unsettled funds and then sell before settlement
- Free riding — buying and selling a security before paying for it — is prohibited
- No pattern day trader (PDT) rule applies (since there is no margin)
Margin account rules:
- Borrow up to 50% of purchase price for stocks (Regulation T)
- Options margin is calculated based on the strategy (see Margin Requirements)
- Full range of options strategies available (subject to approval level)
- Pattern Day Trader (PDT) rule: If you make 4+ day trades in 5 business days with an account under $25,000, you get flagged as a PDT and restricted to closing trades only for 90 days
- Interest charged on borrowed funds (varies by broker, typically 5-12%)
- Margin calls can force you to deposit funds or close positions
Key differences for options traders:
| Feature | Cash Account | Margin Account |
|---|---|---|
| Buy calls/puts | Yes | Yes |
| Covered calls | Yes | Yes |
| Cash-secured puts | Yes (full cash) | Yes (reduced collateral) |
| Spreads | No | Yes |
| Iron condors | No | Yes |
| Naked options | No | Yes (Level 4) |
| Capital efficiency | Low | High |
| Margin call risk | None | Present |
| PDT rule | No | Yes (under $25K) |
When to use a cash account:
- Starting out with limited capital
- Trading only covered calls and cash-secured puts
- Avoiding the PDT rule (accounts under $25K that trade frequently)
- IRAs (which are always cash accounts by rule)
When to upgrade to margin:
- You want to trade spreads and multi-leg strategies
- You need capital efficiency (more positions with less capital)
- Your account is over $25,000 (avoids PDT restriction)
- You understand margin requirements and risk management
Quick Example
You have $20,000. In a cash account, selling a cash-secured put on a $100 stock ties up $10,000 (the full purchase price if assigned). You can have two positions maximum. In a margin account, selling a $100/$95 put spread ties up only $500 (spread width minus credit). You could open 20+ spread positions and diversify across multiple stocks — a fundamentally different risk profile and capital allocation strategy.