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Chapter 10
Accepting exposure
Brokerages and exchanges treat the acceptance of exposure by counter -
parties in a very different way from counterparties who want to gain expo-
sure. There is a good reason for this: although an investor gaining exposure 
has an option to transact in the future, his or her counterparty—an investor 
accepting exposure—has a commitment to transact in the future at the sole 
discretion of the option buyer. If the investor accepting exposure does not 
have the financial wherewithal to carry out the committed transaction, the 
broker or exchange is on the hook for the liability.
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For example, an investor selling a put option struck at $50 per share 
is committing to buy the stock in question for $50 a share at some point 
in the future—this is the essence of accepting exposure. If, however, 
the investor does not have enough money to buy the stock at $50 at 
some point in the future, the investor’s commitment to buy the shares is 
economically worthless.
To guard against this eventuality, brokers require exposure-accepting 
investors to post a security deposit called margin that will fully cover the fi-
nancial obligation to which the investor is committing. In the preceding ex-
ample, for instance, the investor would have to keep $5,000 (= $50 per share × 
100 shares/contract) in reserve and would not be able to spend those reserved 
funds for stock or option purchases until the contract has expired worthless.
Because of this margin requirement, it turns out that one of our strat-
egies for accepting leverage—short puts—always carries with it a loss lev-
erage of –1.0—exactly the same as the loss leverage of a stock. Think about 
it this way: what difference is there between using $50 to buy a stock and