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What Is Options Margin of Safety (OMS)?

Options Margin of Safety (OMS) is an OptionsGeek concept developed by Felix Frey that measures the dollar cushion between an option’s Risk-Reward Breakeven Price (RR$) and the investor’s Target Stock Price. It applies the familiar investing principle of Margin of Safety to options: compare what the market is pricing with what you believe the investment can achieve, then measure the distance between the two.

What Is Options Margin of Safety?

The concept of Margin of Safety has been central to value investing for decades and is closely associated with investors such as Warren Buffett.

At its core, the principle compares the market’s valuation with the investor’s own estimate of value.

An investor might estimate what a company could be worth in the future, discount that value back to today, and compare it with the stock’s current market price. The difference provides a cushion between what the market is asking the investor to pay and what the investor believes the business is worth.

I wanted to apply the same principle to options.

That led to Options Margin of Safety (OMS).

OMS measures the dollar cushion between an option’s RR$ and the investor’s Target Stock Price.

The parallel is straightforward:

RR$ represents the market side of the options comparison. The Target Stock Price represents the investor’s expectation.

For example, using a Call option:

The option has a $12 Options Margin of Safety.

Why the Cushion Matters

A Target Stock Price is an estimate. No matter how much research goes into it, the stock may not reach that exact level.

That makes the amount of cushion important.

Suppose three call options are being evaluated against a $150 Target Stock Price:

Option A provides $25 of cushion between its RR$ and the investor’s Target Stock Price. Option B provides $12. Both options appear cheap relative to the investor’s stock view.

Option C has no positive OMS because its RR$, the market’s risk-reward line for that specific option, is already above the investor’s Target Stock Price. Based on that stock view, the option looks expensive.

OMS therefore answers a very simple question:

How much room exists between what the market is pricing into this option and what I believe the stock can achieve?

FAQs About Options Margin of Safety (OMS)

Is OMS the same as Warren Buffett’s Margin of Safety?

No. Warren Buffett is associated with the traditional Margin of Safety principle used in value investing. Options Margin of Safety is an OptionsGeek concept developed by Felix Frey that applies the underlying idea of a valuation cushion specifically to options.

How is OMS different from RR$?

RR$ establishes the risk-reward line for a specific option. OMS measures the dollar distance between that RR$ and the investor’s Target Stock Price.

Is a larger OMS better?

A larger positive OMS means there is more dollar cushion between an option’s RR$ and the investor’s Target Stock Price. However, OMS is one part of the broader option-selection process and does not by itself determine which option should ultimately be purchased.

Can OMS be negative?

Yes. For a call option, if RR$ is above the investor’s Target Stock Price, there is no positive Options Margin of Safety. The option would appear expensive relative to that stock view.

Does OMS tell me which option to buy?

Not by itself. OMS helps investors measure the cushion available in different options. Additional analysis is required to determine which option offers the most attractive overall opportunity.

Where OMS Is Used Inside OptionsGeek

Options Margin of Safety is built into the Strike Selector and New Options Chain as part of the OptionsGeek option-selection framework.

The Next Question

OMS measures the advantage in dollars. But the same dollar cushion can mean very different things for stocks with different prices.

So the next question is:

How large is that advantage in percentage terms?

That is what Edge is designed to measure.

Explore Related Concepts

Options vs. Stock
Risk-Reward Breakeven Price (RR$)
Edge
New Options Chain
Strike Selector