Portfolio Margin Trading

Portfolio Margin Trading

Customer Portfolio Margin (CPM) options trading can be fantastic if you really know what you are doing.  When it’s used correctly, one can see incredible returns like 30% to 50% in a year.  When it’s not fully understood, it can be disastrous.  Before we get into the details, let’s first discuss the basics of portfolio margin for options traders.


What Is Portfolio Margin?

Portfolio margin is a risk-based margin system.  This means that a trader’s buying power requirement is based on the immediate risk of the active positions in the account.  Each moment as the underlying moves around, the risk does too, so the margins change.  As a trader makes an adjustment to their portfolio, the margins also change.  A savvy trader understands exactly how the margins are calculated, so they can reduce margins whenever they need to.  More often than not though, traders have a portfolio margin account, and they do not know how the broker actually calculates the margins.  This can lead to serious problems such as margin calls and account liquidations.

In order to calculate the buying power requirement, the broker uses a formula.  The most popular formula used today for standard options is the TIMS risk model (Theoretical Intermarket Margin System), which was developed by the Options Clearing Corporation (OCC).  The OCC is partially owned by the CBOE.

Although many brokers use the TIMS risk model, brokers are also allowed to modify the TIMS.  Changes brokers make to the risk model should be approved.


Benefits Of Portfolio Margin

Portfolio margin can provide a trading account with more leverage.  Now, this can be a good thing if the trader has a successful trading plan and can also execute it, but needless to say, if the options trader stinks, they will only lose their money faster.  Therefore, portfolio margin is only beneficial if you are a seasoned, profitable trader who knows how to manage an account during any market.  This usually comes from many years of trading experience.

This is where SJ Options comes in.  We have spent an entire decade developing portfolio margin trading methods.  If you think you can trade it successfully without doing much research on the topic or having much trading experience, you’ll most likely fail.  There are many critical nuances to trading portfolio margin, and if you do not work with an experienced mentor, then you could lose large chunks of your trading account when you enter into the arena.  Think of it as stepping into the boxing ring for the heavy-weight title of the world.  You’ll certainly fail unless you have the right trainer and properly prepare.  Not only can SJ Options save you from losing hundreds of thousands of dollars, but we can show you how to make it too.  What took us so many years to develop can be passed onto you in a matter of days.


Portfolio Margin Vs Standard Margin

While standard margins (Regulation T) are calculated on the maximum risk at the end of the options trade, portfolio margins are calculated on the immediate risk on the account.  However, note that portfolio margin accuracy depends on the accuracy of the broker’s risk model.  That fact should not be overlooked, but it’s an entire discussion of its own, so we’ll address that in another article.

There is a lot more to trading portfolio margin than people realize.  It’s not just as simple as doing what you are already doing in a standard margin account.


Bull Put Spreads And Portfolio Margin

For example, let’s say you trade weekly bull put spreads with standard margin, and you have had success for 2 years.  So, you decide to open a portfolio margin account to get more leverage with the same strategy.  Well, you might not know this, but portfolio margin does not work well with weekly bull put spreads.  Why not?  The standard TIMS risk model measures down about 10% for indices and 15% for other products.  With weekly credit spreads, your margins will be extremely high to begin with, and they will snowball when the underlying drops.  Switching to portfolio margin with this trading method could lead to a fast margin call and has no benefit whatsoever.


Opening A Portfolio Margin Account

Opening a portfolio margin account is rather easy.  Some brokers give option traders portfolio margin based on trading capital, such as Interactive Brokers.  Other brokers provide an exam to clients in order to qualify them, like TD Ameritrade.  However, have you ever seen a broker test a client on how the margins are calculated?  Unfortunately, option traders are allowed into the ring without the proper knowledge or training..

Even though a portfolio margin account is easy to get, we do not recommend it unless you have proper training.  This is very important.  Either learn from SJ Options or someone you trust, but do not try it on your own.  That is a set up for disaster.


Free Broker Education On Portfolio Margin

Brokers do not typically teach clients how to trade portfolio margin properly, if at all.  They provide it, but they do not specialize in trading it.  This is apparent by the methods they are teaching their clients.  Most brokers teach credit spreads, condors, strangles and covered calls – all of which are not a good match for portfolio margin.

Brokers also do a poor job of teaching their clients on how they calculate portfolio margins.  Some brokers will not even tell their clients how they do this.  This proposes a quandary.  If a broker does not allow clients to know how they calculate their margins, then how can the client reduce margins when they need to?  How can a client know if the margins are correct or not?


Being On The Good Side Of Portfolio Margin

In order to benefit from portfolio margin you must do a few things:

  1. Know how your broker calculates the margins.
  2. Know how your strategy works with the broker’s risk model.
  3. Know what increases and decreases margins.
  4. Know how to prevent margin calls.
  5. Have a winning trading method because leverage is a double-edged sword.
  6. Stress test the worse case scenarios of margin expansion and drawdown.
  7. Plan for safety.
  8. Plan everything ahead.  Know what to do at all times.


Those are some tips and free education on trading portfolio margin.  It can be incredibly beneficial to have, but training is essential.  SJ Options has been working with portfolio margin since it was released to retail traders, back in 2008.  We’ve seen it over several market crashes as well as the long, bullish trends.  Over the years, we’ve developed an awesome portfolio margin trading system that we’d love to teach you.  What took us years to discover, can be yours in only minutes.

Thank you for reading this article.  We hope you found it useful.


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