You need to become a master risk-manager to excel in advanced options trading. By respecting your buying power, sizing your positions rationally, and handling assignment and pin risk, you can turn these trades from taking a stressful chance on an asset into a disciplined craft.
The next level: why multi-leg options are the final boss
If trading single calls and puts is like playing checkers, moving into multi-leg options (like vertical spreads, iron condors, or butterflies) is like stepping onto a chess board.
It’s exciting, it’s sophisticated, and it makes you look like you know exactly what those complex charts on your screen mean.
For many, this is a leveling-up moment.
Single options can be great, but multi-leg strategies allow you to define your risk, lower your costs, and potentially profit even if the stock doesn't move an inch. You’ve moved past the buy-and-hope phase and into the engineer-a-win phase.
But, with great power comes a very specific, very grumpy new boss: margin.
With options spreads, success isn't just about picking the right direction for a stock. It’s about managing your funds and ensuring you don’t run out of them.
Real success in options trading isn't just measured by winning trades. It’s reached by making sure one bad trade doesn’t wipe out your ability to keep going.
Let's break down how to manage the risks around multi-leg options without needing a PhD in applied mathematics.
Understanding the margin requirement on spreads
Margin requirements aren't just random numbers your broker made up to ruin your day. In Canada, minimum margin requirements are set by the Canadian Investment Regulatory Organization (CIRO) and are designed to reflect the risk in your margin account - i.e, lower risk, lower margin requirement.
Your margin requirement reduces the buying power (the amount you have available to purchase securities) in your account. One way to think of your margin requirement is as a security deposit on an apartment. You might get every penny of it back when you move out, but while you’re living there, you can’t exactly spend that deposit on pizza and beer.
For multi-leg options, margin requirements follow a risk-based approach called strategy-based margin. With strategy-based margin, your broker acknowledges that your positions work together instead of treating each position separately.
Without strategy-based margin, your broker looks at each option position and says, "Yep, that's risky," then looks at the next one and says, "Yep, that's also risky," and charges you margin on both.
Hold a long call? That's one margin requirement. Hold a short put? That's another margin requirement.
It doesn't matter if these positions are basically hugging each other and canceling out each other's risk. Your broker treats them like they've never met.
Strategy-based margin is where the magic happens. It's like your broker saying, "Wait a minute... These positions actually protect each other."
When you combine options into strategies where the risk offsets, CIRO allows a break on your margin. And honestly? It just makes sense.
Here's how it works:
Without strategy-based margin: You buy a call and sell a call at different strikes (let's say you bought one for $3.00 and sold one for $1.00). Your broker looks at each leg separately and charges you margin on both positions independently.
With strategy-based margin: Your broker recognizes this as a bull call spread. The margin requirement is simply the cost of the trade—the net debit you paid. If you bought the spread for $2.00, your margin requirement is $200 (since 1 contract = 100 shares). That's it. That's also your maximum possible loss if held until expiry, so the margin requirement actually makes sense.
There are multiple strategies that qualify for reduced margin—from protective calls to iron condors to calendar spreads.
Note: CIRO sets minimum margin requirements that all Canadian investment dealers must follow. Your broker can require you to post a higher margin requirement, though.
Position sizing
Why YOLOing doesn't work in spreads
Because spreads are "cheaper" than buying 100 shares of stock, it’s incredibly tempting to over-leverage. If you see a spread that only costs $100, you might think, "I have $10,000. Why not buy 50 of these?"
With the increased leverage comes increased risk and this is where some traders can run into trouble.
The unit approach
One way to look at options trades in a more logical way is through units. Instead of thinking in fluctuating dollar amounts, think in units of risk.
Let’s say your standard unit is $500 of risk.
High conviction: You love the setup? Use 1.5 or 2 units ($750 to $1,000 of risk).
Speculative play: Just want to see what happens with earnings? Use 0.5 units ($250 risk).
By standardizing your risk into units, you remove the emotional weight of the dollar signs and focus on the mechanics of the trade.
Stress testing: preparing for the worst-case scenario
Trading is often easy when the sun is shining. The real test is what happens when the clouds roll in.
Stress testing is simulating what happens to your money if many things go wrong.
Scenario analysis vs. stress testing
These are the two main ways of assessing vulnerability and managing risk when it comes to your spreads:
Scenario analysis: It’s a narrative-driven "what if," like, "What happens to my $KALE calls if salad sales are lower than expected?"
What sets it apart? It’s specific.
Stress testing: This assessment asks questions like, "What happens to my entire portfolio if the agriculture sector drops 20%, volatility spikes by 50%, and interest rates jump?"
What sets it apart? It’s systemic.
How to stress-test manually
Before you hit confirm on a complex, multi-leg trade, try running it through this manual stress test:
Gamma risk
As expiration approaches, delta (how much your option price moves) starts changing faster. This is gamma.
If the stock moves 5% against you overnight, will your loss accelerate faster than you can manage?
Using analysis or risk profile tools in your brokerage platform try simulating how your options react to changes in the underlying asset over various timeframes by:
±5%
±10%
±20%
Vega risk
This is a big one for iron condors.
Vega measures your sensitivity to implied volatility. Even if the stock price doesn't move, if the market gets scared and IV spikes, your iron condor could lose money.
You need to know if you’re short vol or long vol.
Using the analysis or risk profile tools in your brokerage platform see the immediate effect on your spread’s net profit and loss by manually adjusting implied volatility by:
±10%
±20%
±30%
Liquidity risk
Check the bid-ask spread. If you’re trading an obscure biotech stock with a $1.00 spread between the buyer and the seller, you might find that even if you're winning the trade, you can’t exit without giving up all your profits to the market makers.
Ask yourself this: If I need to exit right now, is the bid-ask spread wide enough to eat my profits?
Assignment and pin risk: the weekend boogeyman
Multi-leg options involve selling options, which means you’ve taken on an obligation. This introduces two risks that keep many traders up on Friday nights: early assignment and pin risk.
Early assignment risk
If you sold a call as part of a spread and the stock rockets up, you might get assigned. This means someone exercised their right to buy those shares from you.
Suddenly, you wake up one morning and realize you’re “short" 100 shares of stock you never owned.
The most common time for early assignment is right before an ex-dividend date. If the dividend is worth more than the remaining "time value" of the option, expect to be assigned.
To fix this, if your short leg is deep in-the-money, you could close the spread or roll it to a further expiration date before the assignment happens.
Pin risk
Pin risk happens when the stock price closes almost exactly at your short strike price on Friday afternoon at 4:00 PM.
Do you own the stock? Do you not own the stock? You won't know for sure until after the markets close.
This can be a nightmare because the market is closed, but you’re carrying unknown risk over the weekend.
A common rule of thumb here is to close or roll your position.
If a spread is anywhere near the strike price on Friday afternoon, it’s prudent to consider if that risk is worth the remaining few dollars of profit.
