What Does Portfolio Margining Mean For You?

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What Does PM Mean For You?
We’ve already discussed the definition (Let’s Talk About: Portfolio Margining) and development (The Battle For Margin) of portfolio margining. However, at the end of the day, there is only one question that truly matters to traders and investors- what does portfolio margining mean for your account?

The best way to answer that question is to look at a few examples...



The Married Put
Providing portfolio insurance is one of the most basic functions of the options market. Countless investors and traders rely on put options to safeguard their portfolios against adverse market movements. Unfortunately, because strategy-based margin does not take into account offsetting positions, most customers are forced to make usurious margin deposits on these positions.

Even the married put, a position with limited downside risk, is subject to these stringent margin requirements.



Married Put Margin Example
Provided By: Fimat

Sample Position:
Long 100,000 Shares IBM @ $115.13
Long 1,000 Puts IBM OCT 115 @ $3.30

Traditional Margin Requirement:
50% of Equity Purchase Cost ($11,513,000) = $5,756,500
+
100% of Put Premium = $330,000    
TOTAL TRADITIONAL MARGIN DEPOSIT = $6,086,500

Portfolio Margin Requirement:
Maximum loss down 15% in stock = $1,726,950
-
Equity loss offset by theoretical gain in put options of $1,400,000
Net Loss = $326,950
TOTAL PORTFOLIO MARGIN DEPOSIT = $326,950

In the above example, nearly $6 million worth of capital was liberated with absolutely no change to the risk profile of the account. Of course, not every position will experience such dramatic savings. However, this example illustrates the significant differences that are possible with portfolio margining.

Continued In: "Part Two: Index Straddles"...

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