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