BUYING POWER & COLLATERAL
Plain English
When you sell options, your broker locks up some of your cash as collateral (like a security deposit) to guarantee you can cover potential losses. This is your 'buying power reduction.' The riskier the trade, the more cash is locked up.
Going deeper
Buying Power Reduction (BPR) is the amount of capital your broker holds as collateral when you sell options. For defined-risk trades (like spreads), BPR equals the max loss of the trade. For undefined-risk trades (like naked puts or calls), BPR is calculated based on the underlying price and is typically much larger. Cash-secured puts require the full strike price times 100 in cash. Understanding BPR is critical for position sizing and determining how many trades you can have open simultaneously.
Examples
Defined-Risk BPR
You sell a $5-wide Bull Put Spread for $1.50 credit. Max loss = $5 - $1.50 = $3.50 per share = $350. Your broker holds $350 as collateral. You can't use this for other trades until the position is closed.
Cash-Secured Put BPR
You sell a $50 Put. Your broker requires $5,000 in cash (50 x 100 shares) as collateral to guarantee you can buy the shares if assigned. This is why it's called 'cash-secured.'