Testing is done on a position’s implied volatility, and the margin requirement will be equal to the largest loss calculated for any given scenario. These 10 points are also called scenarios or risk array.įor broad-based equity indexes, such as the S&P 500® (SPX) and Nasdaq-100® (NDX), the range is divided into 20 equidistant points to capture more price moves along the risk array.Ī portfolio margin calculation uses an industry-standard options pricing model and stress testing. These price ranges are then divided into 10 equidistant points, and the loss or gain on the position as a whole is calculated at each of the 10 points.
With portfolio margin, stock and options positions are tested by hypothetically moving the price of the underlying generally between +/- 15%. Here’s a look at how portfolio margin works and what using portfolio margin might mean to an individual trader. But if you want more investing flexibility with a margining system that’s more capital-efficient in calculating position risk, portfolio margin might be worth consideration. That can help create more opportunities to diversify or create a buffer when markets turn volatile.īut there’s always a flip side-lower margin requirements add leverage and risk. Some experienced traders with well-diversified portfolios who are risk hedgers and use options as part of their overall trading strategy choose to use portfolio margin because it can translate to more buying power in their account. For qualified accounts, portfolio margin can be used to offset a measure of risk by consolidating-also known as netting-their positions to account for the overall risk of their portfolio. Margin is a broad topic with many approaches, benefits, and risks. Learn how traders can qualify for portfolio margin.
Understand how portfolio margin works and how a trader might use portfolio margin
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