Short Strangles Portfolio Margin

Short Strangles and Portfolio Margin, A Death Trap?

Customer Portfolio Margin (CPM)

What is CPM?  CPM is a margin methodology in which the margins are supposed to be based on risk.  The standard risk model used to calculate these risk-based margins is called the TIMS (Theoretical Intermarket Margin System).  TIMS was developed by the OCC (Options Clearing Corporation).

Interestingly, one method used by the TIMS to calculate margins assumes that the volatility of the underlying will remain constant.  This methodology could mean a disaster for short strangle traders.


Margin Expansion on Short Strangles

Many option traders qualify for a CPM account, but they do not understand how the TIMS risk model works.  Brokers make it very easy for clients to obtain this type of account, and traders are not typically tested on how it calculates margins.

This puts traders in a dangerous situation, especially when trading short strangles.  Let’s consider the following scenario:

A trader has an account value of $200,000.  This trader invests 50% of their buying power into short strangles (you’d be surprised how common this is).  Then suddenly, the underlying drops 10% quickly and volatility shoots way up.  Since the short strangle comprises -Vomma, -Vega and -Gamma, the margins could quickly double.  Now, the margin requirement jumps to $200,000, but at the same time, the trader experiences unrealized losses of $50,000, so their account value falls to $150,000.

This scenario means the trader now has a $50,000 margin call.  The broker liquidates the trader’s positions and loses another $50,000 during liquidation on the trader’s account.

This sounds like a nightmare, but it happens quite often.


Trading CPM Effectively

In order to trade a CPM account successfully, one has to understand how the risk model calculates margins, and one needs to design trades around this model.  Risk must be reduced by constructing proper dynamically hedged Vega positions, and Gamma must be designed carefully as well.  A lot of thought and planning must go into a trading system, so it works smoothly with CPM margins.

Traders who do not understand the TIMS model run into serious problems.  With proper training, CPM can be very rewarding, but without it, a trader’s success is not likely to ever become realized.

In our SJ Options course we teach our clients how to trade CPM in safer ways.  We’ve been teaching CPM longer than any other program in the world.


How We Make CPM Trading More Effective For Our Clients

  1. Stabilize margins through intelligent design.
  2. Stabilize margins through effective use of vomma, vanna and vega.
  3. Stabilize margins through better gamma management.
  4. Stabilize margins through insurance against serious market declines.
  5. Stabilize margins through understanding the TIMS margin calculations.
  6. Increase probabilities by design and sophisticated adjustment processes.
  7. Capture volatility skews that are entirely invisible to other traders.
  8. Make effective use of Lambda.



recent posts

Unveiling the Truth: Naked Put vs. 112 Strategy in a Market Crash

Unveiling the Truth: Naked Put vs. 112 Strategy in a Market Crash If you’re an options trader, you’re likely well aware of the debates surrounding the riskiest strategies. Today, we’re taking a deep dive into the comparison between the notorious naked put and the intriguing 112 put front-ratio strategy, particularly in the tumultuous waters of […]

Navigating the World of Options Strategies: Ensuring Safety and Success

Navigating the World of Options Strategies: Ensuring Safety and Success In the fast-paced world of options trading, where strategies abound and opportunities emerge and vanish in the blink of an eye, ensuring safety and success is paramount. With a plethora of options strategies bombarding traders from every angle, it’s crucial to discern which ones are […]



0DTE Strangle Strategy, 112 Options Trading Strategy, 1DTE Options, ATM, Bearish Options Strategies, Best Options Course, Butterfly Spread, Calendar Spread, Credit Spread Backtest, Credit Spreads Strategy, Day Trading, Defective Apple iMac, Full Time Options Trading, Greek Charm, Greek Delta, Greek Gamma, High Order Greeks, imac, imac problems, implied volatility, iron condor, IV Rank, James Cordier, Karen The Supertrader, Low Risk Trading, Naked Puts, Option Greeks, Option Strategy, option trading, option trading checklist, option trading lifestyle, option trading mindset, option trading myths, option trading profits, option trading strategies, optioncolors, optioncolors software, options analysis, Options Basics, options course, options learning course, options strategies, options trader, options trading, options trading course, options trading newsletter, options trading performance, options trading software, otm, pop, popular option trades, portfolio margin, portfolio margin trading, probabilities, probability of profit, profitable, review, San Jose Options, san jose options review, scalable, Short Condor, Short Strangle, short strangles, sj options review, spread, spreads, strangle, strategies, tasty trade, tasty trade credit spread, tasty trade credit spreads, tasty trade iv rank, tasty trade ivr, tastytrade, tastytrade credit spreads, tastytrade strangles, tastytrade verticals, technical, testimonial, theta, time decay, trading volatility, unbalanced condor, vanna, vega, Vertical Credit Spreads, veta, vomma, weekly credit spreads, Winners and Losers