Margin Trading as a Put Option

Abstract

Margin trading was and still is one of the most important aspect of the retail brokerage business. Moreover, margin trading is the real-life representatives of leverage and short position in financial modeling, which is an important part of academic finance. However, most effort has been on explaining its popularity and assessing empirically its effect on the capital market rather than studying the activities itself. This paper explores a new approach of researching margin by taking advantage of the flexibility and extensive framework of option pricing and shows how it could allow for a deep and robust analysis of margin trading business.