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Portfolio Margin vs. Reg T Margin


Could you kindly elaborate on definition and the difference between Porfolio Margin vs Reg T margin? Thank you for your time.



Your broker is the best place to get that information, but here is how I remember it (I am not researching it, but replying from memory).  One comment:  If you opt for portfolio margin, risk management becomes even more essential.  Using PM, it's far easier to lose your entire account – and quickly.

Reg T margin is 'regular' margin, imposed on the vast majority of traders.  Each individual position – single option or spread – has a minimum margin requirement.  For example a 10-point iron condor requires $1,000 margin.  Reason:  An account value of minus $1,000 is the worst possible result when owning that iron condor position in your portfolio.  Thus, if the worst occurs, the account must contain $1,000 initially.  That protects the broker because the account cannot be worth less than zero (cannot go into deficit).  In theory it protects the customer, but no one in the industry cares about the customer.

Thus, if you own an account with $37,000 – you can own up to a maximum of 37 such iron condors. Your broker may have its own software that looks to combine positions to reduce the Reg T margin requirement. 

But this is basically how it works.  You have positions with a certain amount of risk – you must have the cash to cover that risk in your account.  Do not confuse this with buying stock.  Your broker will lend you up to half the cost of buying stock.  If the stock price declines and your account loses value, then your broker requires that you deposit cash into your account. This can be a problem when you do not have cash to send.  The good news for option traders using Reg T margin is that they are protected from this possible margin call because they must be fully covered against potential loss right off the bat.  From day one.

When trading those IC, you collect cash.  Most brokers did allow you to use that extra cash to trade even more iron condors – and that makes perfect sense.  The cash is there, and there is no reason why you cannot use it.  There was a movement to eliminate your ability to use that cash, but I don't know if it ever went through.

Portfolio margin is based on a methodology that calculates potential loss under a set of market conditions.  I believe those include a 15% increase and decrease in the value of each underlying asset plus some volatility changes.

Here is how Interactive Brokers describes it:

"One of the main goals of Portfolio Margin is to reflect the lower risk inherent in a balanced portfolio. Depending on the composition of the trading account, margin requirements under Portfolio Margin could be lower than under the Reg T rules. This translates to greater leverage (note that trading with greater leverage involves greater risk of loss). Conversely, for a portfolio with concentrated risk, the requirements under Portfolio Margin may be greater than those under Reg T, as the true economic risk behind the portfolio may not be adequately accounted for under static Reg T calculations."

There is no margin requirement for each individual position per se.  Instead, the positions are lumped together, and the risk of the entire portfolio is determined under those specific market scenarios.

This is both good and bad for the trader.  One can manipulate positions such that you get to own a much (much) larger portfolio of positions.  More chance for profits, but a much greater chance to get demolished by trading far more size than is good for you

I've stopped using portfolio margin – just to keep myself from trading too much size.  I used to carry as much as 4x the Reg T allotment – and that's too much.

If you own some cheap naked calls and puts, the 15% market moves will not show as much loss as it would without the presence of those options.  Thus, you can quadruple the number of positions owned, spend some cash on protective options, and pass the portfolio margin test.  If you are truly disciplined, and truly profitable, it may pay to spend some cash on insurance and trade more size than you do right now.  But that would be a BIG mistake for most of you.  Be very careful.

Repeat warning:  Owning a portfolio that passes the portfolio margin parameters (i.e., you are allowed to own it) does not mean that you cannot lose far more than you can afford to lose. It also sets up a chance to receive margin calls any time that the value of your portfolio declines.  That is something to avoid at all costs.




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