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What Is Portfolio Margin?

By Laurel Tincher · February 22, 2022 · 4 minute read

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What Is Portfolio Margin?

Portfolio margin is a way of calculating the margin requirements for derivatives traders using a composite view of their portfolio. Portfolio margin accounts offset investors’ positive and losing positions to calculate their real-time margin requirements. Portfolio margining can provide investors with lower margin requirements, allowing them to use more of their capital in trades.

Portfolio Margin, Defined

Portfolio margin is a type of risk-based margin used with qualified derivative accounts. It calculates a trader’s real-time portfolio margin requirements based on a risk assessment of their portfolio or marginable securities.

If a trader has a well-hedged portfolio they will have a lower margin trading requirement, allowing them to utilize more of their cash for trades and take advantage of more leverage. Of course the more margin a trader uses, the higher their risk of loss.

How Does Portfolio Margin Work?

Investors with qualified accounts where they trade derivatives including options, swaps, and futures contracts must maintain a certain composite-margin. Portfolio margin is a policy with a set of requirements that aim to reduce risk for the lender.

To determine portfolio margin, the lender consolidates the long and short positions held in different derivatives against one another. This works by calculating the overall risk of an investor’s portfolio and adjusting margin requirements accordingly.

The portfolio margin policy requirement must equal the amount of liability that remains once all the investor’s offsetting (long and short) positions have been netted against one another. Usually portfolio margin requirements are lower for hedged positions than they are with other policy requirements.

For example, the liability of a losing position in an investor’s portfolio could be offset if they hold a large enough net positive position in another derivative.

Margin vs Portfolio Margin

Margin is the amount of cash, or collateral, that investors must deposit when they enter into a margin trade. Margin accounts work by allowing a trader to borrow money from their broker or exchange. By borrowing cash to cover part of the trade, an investor can enter into much larger positions than they could if they only used cash on hand.

But borrowing money poses a risk to the lender, so they require that traders hold a certain amount of liquid cash in their account to remain in margin trades. If a trader loses money on a position, the broker can then claim cash from the trader’s account to cover the loss.

Traditional margin loans under Regulation T require investors to put up a certain percentage of cash for margin trades based on the amount of the trade. Portfolio margin calculates the required deposit amount based on the risk level of the investor’s overall portfolio, by looking at the net exposure of all the investor’s positive and losing positions. If a derivative investor has a well-hedged portfolio, their margin requirement can be much lower than it would be with traditional margin policies.

Portfolio Margin

Regulation T Margin

Initial and maintenance margin is the same Maintenance margin = 50% of initial margin
Traders can use margin on long options and they can use long options as collateral for other marginable trades Traders can’t use margin on long options and long options have a 100% requirement
Trader’s overall portfolio is evaluated by offsetting positions against one another Margin requirements are fixed percentages
Buying power (maintenance excess) = net liquidation value – margin requirements Margin equity = stock + (+/- cash balance)
Broad based indices allow for more leverage Less flexibility on margin requirements
Stock volatility and hypothetical future scenarios are part of portfolio margin calculation Margin requirement is a fixed percentage of trade amounts

Portfolio Margin and Volatility

Portfolio margin calculations take stock volatility by factoring in the outcome of various scenarios.

Portfolio Margin Calculation

Calculating portfolio margin is a multi-step process. The calculation includes hypothetical market volatility and theoretical price changes.

The steps are:

1.    Create a set of theoretical price changes across the trader’s margin account. These ranges may be different when trading options, stocks, and indices.

2.    Divide the range and calculate the gain or loss on the overall position for each theoretical scenario.

3.    Incorporate implied volatility into the calculated risk array.

4.    Calculate the largest possible loss that could occur with each theoretical scenario. That amount is the margin requirement.

💡 Recommended: Calculating Margin for Trading

Key Considerations

Portfolio margin can be a great tool for experienced investors who want to invest more of their available cash. However, there are some important things to keep in mind:

•   Margin trading is very risky and is not recommended for beginning traders

•   Traders must keep $100,000 net liquidating value in their account. If the account goes below this, they may lose their active trading positions and the ability to trade on margin.

•   Traders must get approval to enable margin trading on a brokerage account before they can utilize the portfolio margin rules.

If an investor’s margin balance falls below the margin requirement, they could face a margin call, which would require them to either deposit more cash or sell securities in order to increase their balance to the required amount.

Portfolio Margin Requirements

The Chicago Board of Options Exchange (CBOE) sets the rules for portfolio margin. In 2006 it expanded margin requirements, with the goal of better connecting requirements to portfolio risk exposure. Reducing the amount of portfolio margin required for lower risk investment accounts frees up more capital for leveraged trades, benefitting both the trader and the broker.

Brokers must use the approved portfolio margin calculation model provided by The Options Clearing Corporation (OCC), which is the Theoretical Intermarket Margining System (TIMS) . TIMS calculates the margin requirements based on the risk of the portfolio on a daily basis.

To remain qualified for portfolio margin, investors must maintain a minimum of $100,000 net liquid value in their account.

There are additional requirements derivatives traders should keep in mind if they use leverage to trade. Regulation T is a set of regulations for margin trading accounts overseen by the Federal Reserve Bank. Other regulations regarding the way brokers handle margin accounts include Nasdaq Rule 2860 , New York Stock Exchange Rule 431 , and the Financial Industry Regulatory Authority (FINRA) Rule 721 .

Brokers must evaluate potential margin traders before allowing them to start margin trading, and they must maintain a minimum equity requirement for their trading customers. In addition, brokers must inform traders of changes to margin requirements and of the risks involved with margin trading.

The Takeaway

Margin trading can be very profitable and is a great tool for investors, but it comes with a lot of risk and isn’t recommended for most traders. If you use margin trading, however, for derivatives, portfolio margin can free up more capital for trading.

SoFi offers margin investing at some of the most competitive rates in the industry. At 2.5% interest*, investors can tap into their existing portfolio to fund new investment opportunities and potentially increase their returns.

Learn more about SoFi margin investing.

Photo credit: iStock/filadendron


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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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*Borrow at 3%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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