What Is Buying Power? Definition & Example

Why It Matters

Buying power determines how much you can trade. It includes your cash plus margin leverage — but using it all leaves no buffer for volatility-driven margin increases.

How It Works

Cash + (marginable securities × margin rate). For Reg T: roughly 2x equity for stocks, varying for options. For PM: risk-based, typically 3-6x equity. Buying power decreases as you open positions and their margin is reserved.

Example

$100K equity in a Reg T account. Buying power for naked puts: ~$100K (margin = ~20% of underlying). For credit spreads: ~$200K (margin = max loss, typically smaller). For stock: ~$200K (50% Reg T).

Common Mistakes

Treating buying power as spendable cash. It's not — it's margin capacity. Using 90% means a 10% adverse move can trigger a margin call. Treat buying power as a resource to keep in reserve, not to maximize.

Related Terms

DTE (Days to Expiration)

Enter at 30–45 DTE for optimal theta/gamma balance. Close or roll at 21 DTE or 50% profit — whichever comes first.

Assignment

Not a disaster — it's the plan in the wheel strategy. If you only sell puts on stocks you'd own, assignment is just the next step.

Roll (Rolling)

Roll for a net credit or don't roll at all. Rolling for a debit just delays a loss. Best done before the position goes deep ITM.

Annualized Return

Looks impressive but is misleading if you ignore losses. Track actual account returns, not annualized returns on winners only.

Breakeven

Always know your breakeven before entering. If the stock can realistically reach it, either widen the margin or skip the trade.

Bid-Ask Spread

Wide bid-ask = hidden cost on every trade. Stick to liquid underlyings where the spread is under 5% of the option price.

Frequently Asked Questions