Table of Contents
There are two common ways to use margin in a trading account: cross margin and isolated margin. Cross margin involves margin that is shared between open positions. Isolated margin, on the other hand, is margin assigned to a single position that is restricted from being shared.
Cross margin may help prevent quick liquidations and has a better capability to withstand portfolio losses. Isolated margin offers better flexibility in that other portfolio holdings will not be affected if a single position is liquidated.
Key Points
• Cross margin is a system that allows traders to share margin across positions and accounts by using excess margin from one account to collateralize positions in a different account.
• Cross margining can help prevent a single losing position from causing a margin call or forced liquidation.
• Isolated margin is using only a single position as leverage for borrowing.
• Isolated margin can protect larger portfolio holdings from margin calls or forced liquidation because it limits leverage to only a single position.
• Cross margining can be an effective risk-management tool, particularly for long-term positions, because it increases available liquidity, which protects the investment during periods of volatility.
What Is Cross Margin?
Cross margin was introduced in the late 1980s as a way to reduce systematic risk in the market and to help traders better manage their portfolios when engaging in margin trading.
At the institutional level, cross margin offsets the value of hedged positions maintained by firms at multiple clearinghouses. Cross margining recognizes intermarket hedged positions, thus allowing for reduced initial margin requirements, fewer margin variations, and smaller net settlements.
For individual traders, cross margin provides more leeway in how open positions in a portfolio move. Cross margin takes excess margin from one margin account and gives it to another to satisfy maintenance margin requirements. That sharing of margin allows the trader to use all available margin balances across their accounts.
How Does Cross Margin Work?
Cross margin is not a simple calculation, and it runs on sophisticated algorithms. By sharing margin across accounts, traders can access more exposure without depositing more capital. Clearinghouses, central counterparties, and brokers determine cross margin amounts and automatically move margin between accounts that have registered for the service.
Traders might prefer cross margining, as a single losing position might not be liquidated quickly when market conditions change. Excess margin is transferred from another account to meet a minor shortfall in minimum maintenance. Cross margin helps to avoid quick margin calls and forced liquidations.
💡 Quick Tip: One of the advantages of using a margin account, if you qualify, is that a margin loan gives you the ability to buy more securities. Be sure to understand the terms of the margin account, though, as buying on margin includes the risk of bigger losses.
How to Use Cross Margin
Cross margin is best used when a trader has multiple margin trading accounts. A cash account and margin account work differently, and cross vs. isolated margin only applies to the latter type. For traders concerned about a single position being stopped out, it is generally better for them to use cross margin vs. isolated margin, as the former is a tool to help prevent unnecessary forced liquidations. So, a trader must trade with a broker who offers this service.
Volatile markets demonstrate the benefits of cross vs. isolated margin. With cross margin, when there are extreme movements in single securities, it is hard to keep a handle on individual positions’ margin requirements. Cross margining can calculate amounts automatically and move excess margin to other accounts that need it.
Increase your buying power with a margin loan from SoFi.
Borrow against your current investments at just 4.75% to 9.50%* and start margin trading.
*For full margin details, see terms.
What Is Isolated Margin?
Isolated margin is margin assigned to a single position that is restricted to a specific amount. When the allocated margin drops below an unrealized profit and loss threshold or the maintenance margin requirement, the trader may face a margin call or potentially a liquidation of their assets.
The upshot is that other positions in the account are not affected. Isolated vs. cross margin tends to offer better flexibility because it can divide the trader’s funds, but stop-outs can happen quickly in volatile markets. Isolated margin vs. cross margin are different from each other, and both are used in crypto trading. It’s important to know what decentralized exchanges are when using either margin type when buying and selling crypto.
How Does Isolated Margin Work?
Isolated margin works by setting aside a margin amount for a single position. Volatile and speculative positions are sometimes good candidates for the use of isolated margin. It can be helpful when you don’t want other portfolio holdings to be impacted by a change in the value or margin requirements from that single position.
How to Use Isolated Margin
Traders have the flexibility to adjust their isolated margin amounts, which can be useful when managing their portfolio positions. You should consider isolated margin when you want more flexibility with a single position and seek to restrict the risk of potential loss to only a small piece of your account. Isolated vs. cross margin can also require more nimble attention to the market, as you might need to actively adjust the isolated margin amount.
Cross vs Isolated Margin Compared
Let’s review the similarities and differences in cross vs. isolated margin. In general, cross margin is preferable for long-term strategies, as market- and single-asset volatility could always strike. Cross margin helps portfolios endure volatility with fewer automated stop-outs. The downside is that if there is an extremely volatile event, and liquidations occur, then total portfolio losses could be severe.
Similarities
Initial and maintenance margin rules apply to your account whether you use cross margin or isolated margin. The two strategies help to reduce the risk that your overall portfolio will experience fast liquidations.
Differences
The key difference between the two is that cross margin shares margin between positions and accounts. This can be a helpful feature for long-term investors and during periods of market volatility. Overall, cross margin may be a better risk-management tool for complex portfolios that consist of multiple positions or options and other derivatives.
| Cross Margin | Isolated Margin |
|---|---|
| Margin shared between open positions | Restricts margin to single positions |
| Reduces the risk of liquidations | Tighter liquidation thresholds — more stop-outs possible |
| Ideal when used with intermarket hedged positions, as margin requirements can be offsetting | Traders can actively manage margin amounts on single positions |
Advantages and Disadvantages of Cross Margin
There are advantages and disadvantages of cross margin:
| Cross Margin Advantages | Cross Margin Disadvantages |
|---|---|
| The entire portfolio can be used to margin a position, as excess margin is transferred from one position to another. | Cross margin amounts cannot be adjusted like isolated margin amounts can |
| The available balance can be added to isolated holdings. | The portfolio loss potential is higher if the market moves against the trader in an extreme way. |
| It’s useful in a volatile market to avoid quick stop-outs. | One position change can negatively impact other holdings. |
Advantages and Disadvantages of Isolated Margin
Similarly, there are upsides and drawbacks to isolated margin:
| Isolated Margin Advantages | Isolated Margin Disadvantages |
|---|---|
| Liability is limited to the initial margin posted. | Excess margin won’t be transferred to a losing position. |
| It’s suitable for a single speculative position. | Volatility can cause fast liquidations. |
| Dividing funds between assets can reduce the risk of major loss across a portfolio | Account may require close monitoring to increase the collateral amount depending on market activity. |
The Takeaway
Cross margining is a feature that increases a firm’s or individual trader’s liquidity and trading capability by allowing excess margin to collateralize across separate positions or accounts. In doing so, cross margining can distribute risk across different assets and utilize capital from assets more efficiently. Isolated margin is margin assigned to just one position — if it is liquidated, other account positions are not affected. Isolated margin is assigned to a single position and restricted from being shared.
It’s important that traders who engage in margin trading understand the concept of cross vs. isolated margin. If you feel like you’re in over your head while trading on margin, it may be a good idea to consult with a financial professional for guidance.
If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.
FAQ
How is cross margin calculated?
In options trading, cross margin is calculated by clearinghouses and their clearing members, including prime brokerages that offer margin services. They use the proprietary System for Theoretical Analysis and Numerical Simulations (STANS) developed by the Options Clearing Corporation of Chicago (OCC). At the end of each trading day, hedged positions held at separate clearinghouses are combined into a single portfolio to calculate the real risk of leveraged and hedged positions.
Is isolated margin the same as isolated leverage?
Isolated margin and isolated leverage are similar concepts. While isolated margin is the margin allocated to a single position, isolated leverage refers to the multiplier you’re using to borrow money for that position, or the degree to which you’re using leverage. For example, you may be using margin to increase your buying power by 2x.
What is the main benefit of cross margin?
Cross margin is when excess margin is transferred to another margin position or account to satisfy maintenance margin requirements. It allows traders to use their available margin balances across all their accounts. It makes it possible to have more exposure without the extreme risk of liquidation should the market move against the trader.
Photo credit: iStock/Mirel Kipioro
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.
Trading securities on margin loans involves high risk and costs and is not suitable for all investors. It is possible to lose more than your initial investment when using margin. Please see more details at https://www.sofi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf
SOIN-Q126-130