This is a fun one and I’m pretty jacked up to write about it.
We all know about having a cash secured account and a margin account. But for those fortunate enough to have the capital requirements and experience, there is a different type of account available.
These specific individuals are allowed portfolio margin accounts where the leverage can easily get up to 10:1 for an individual investor. Remember, leverage is not bad, it is only a good thing as it allows us to hunt and react on more and more opportunity. We will spend the rest of this article speaking about the benefits of portfolio margining as well as go through the margin requirements from the portfolio margin calculation.
What is Portfolio Margining?
GG is not speaking about a portfolio margin account here, however, he is speaking about how money attracts money. While this isn’t something that we like to yell and scream about, portfolio margining gives those with these types of account ridiculous benefits. How much do I need to get this account? Well for example, on TD Ameritrade, one can apply for portfolio margining if they following two bits of criteria are met:
- Minimum requirement of a net liquidation value in an account of over $125,000
- Passing a 20 question test as well as certain years of experience as decided upon my FINRA
Once you pass the test and get approval, you must maintain a net liquidation balance over $100,000 at all time in order to continue being eligible for portfolio margining. Full disclosure I have a portfolio margin account with TD.
Now that we have an account…what the hell is portfolio margining and why is it so beneficial to have this type of account?
In a typical margin account, one must put up 50% of the capital required to hold stock. At the same time, if one is able to have Tier 3 margining, they need to put up 20% of the strike price value for uncovered options as margin. Neither of these scenarios is longer valid with portfolio margining.
What makes these accounts so special is that the margin required is not a fixed number and it is equivalent to your account being stress tested to find your true risk. Let me explain…
Portfolio Margin Calculation
We mentioned that our positions are stressed to see what our true risk is. Our positions are stressed up and down a certain percentage based off which type of security they are. Whichever side creates the largest potential loss on the stress test is the portfolio margining requirement. Let’s use some examples.
Broad Based Indexed: -8% to +6%
Broad based indexes such as the $SPX (S&P 500) are stressed down 8% and up 6%. Whichever stress creates the largest loss becomes the margin requirements according to the portfolio margin calculation.
Here we are selling the $2000 put in the $SPX (S&P 500) expiring in the April monthly expiration cycle. We collect $2.25 for doing so. But what about the portfolio margin calculation?
Here we can see that trade is stressed up 6% and down 8%. Our largest loss would be on the 8% down which would result in $1,352.74 in theoretical losses. This becomes our portfolio margining requirement for this trade.
Selling this put cash secured would cost $200,000 and selling it in a margin account would cost $40,000. But selling it in a portfolio margin account cost us just $1,352.74. Not bad.
Non-High-Capitalization Broad Based Indexes: -10% to +10%
These types of indexes like the $SPY (S&P 500 Index ETF) are stressed up and down 10%. Let’s use buying stock to figure out what is going on for these types of securities.
Here we are just simply buying 100 shares of $SPY. But what about the portfolio margin calculation?
Here we can see the trade is stressed up and down 10%. Our largest loss again would be to the downside resulting in a $2,376 loss if the $SPY was to go down 10%. This is the cash we need to put up in a portfolio margin account.
Buying 100 shares of $SPY cash secured would cost $23,674 while buying 100 shares in a margin account would cost $11,837. With our friendly portfolio margining, we would only be required to put up $2,367, 1/10th of the cash secured cost and 1/5th of the regular margin cost.
Individual equities are stressed up and down 15%. For this example, we will use selling a put in $FB.
Here we are just selling a $130 put in Facebook expiring the third Friday in April. But what about the portfolio margin calculation?
Here we can see the trade stressed up and down 15%. Our largest loss again would be on the downside resulting in a $1,315.81 loss. This is our portfolio margining requirement on this trade.
Selling this put in a cash secured account would cost $13,000 while selling it in a regular margin account would cost $2,600. Selling this put in our portfolio margin account would only cost $1,315.81.
Leverages products such as $VXX (double leverage) or $UVXY (triple leverage) have the same requirements as normal portfolio margining for equities except they receive a multiple for whatever amount of leverage they have. For example, $VXX would get stressed up and down 30% while $UVXY would get stressed up and down 45%.
Portfolio Margining an Account
Positions in a portfolio offset each other. Portfolio margining takes all of the positions in the account and takes the margin requirements of each position and adds them all up. But positions can offset each other. If we have five positions in indexes and ten in equities, portfolio margining takes all of the individual margin requirements and calculated the total margin needed if each position was stressed against one another. We will use the example of short 100 shares of Facebook, long 100 shares of Apple, and short 100 shares of $GLD.
Add up all three of those and what do we get? $5,876.
Final Say on Portfolio Margin Accounts
They are a 100% must have for those with the capital requirements and years of experience. Remember, the additional leverage allows us to put on more trades as we see opportunities arise. We don’t worry about risk. We worry about opportunity.