Portfolio Margining
Customer portfolio margining is a method of calculating customer margin
in which the margin requirement is based on the “up and down risk” of the
portfolio. Before the advent of portfolio margining, retail traders were
subject to strategy-based margining, also called Reg. T margining, which in
many cases required a significantly higher amount of capital to carry a
position than portfolio margining does.
With portfolio margining, highly correlated securities can be offset
against each other for purposes of calculating margin. For example, SPX
options and SPY options—both option classes based on the Standard &
Poor’s 500 Index—can be considered together in the margin calculation. A
bearish position in one and a bullish position in the other may partially
offset the overall risk of the portfolio and therefore can help to reduce the
overall margin requirement.
With portfolio margining, many strategies are margined in such a way
that, from the point of view of this author, they are subject to a much more
logical means of risk assessment. Strategy-based margining required traders
of some strategies, like a protective put, to deposit significantly more
capital than one could possibly lose by holding the position. The old rules
require a minimum margin of 50 percent of the stock’s value and up to 100
percent of the put premium. A portfolio-margined protective put may
require only a fraction of what it would with strategy-based margining.
Even though Reg. T margining is antiquated and sometimes unreasonable,
many traders must still abide by these constraints. Not all traders meet the
eligibility requirements to qualify for portfolio-based margining. There is a
minimum account balance for retail traders to be eligible for this treatment.
A broker may also require other criteria to be met for the trader to benefit
from this special margining. Ultimately, portfolio margining allows retail
traders to be margined similarly to professional traders.
There are some traders, both professional and otherwise, who indeed have
made “big money,” as the student in my class said, trading delta neutral.
But, to be sure, there are successful and unsuccessful traders in many areas