Portfolio Margin

I'd like to share my experience with portfolio margin on short options and solicit yours.

What I learned recently, to my surprise, is that PM is very bad for option writing.

With RegT, the rule is clear:
100% * option market value + (20% * underlying market value - out of the money amount or 10% * underlying market value, whichever is greater) or $2.50 * multiplier * number of contracts, whichever is greater.

With PM, I could get no useful information from my broker (interactive brokers) - I was told that it is risk-based and impossible to calculate manually.

In practice, however, I discovered that in my PM account, the margin is at least the value of the underlying stock when I short naked calls, regardless of how far the strike is OTM. For example, the stock trades at $5, a call@7 sells at $1. Selling 10 contracts raised my margin by $5000. I wonder if there is any rule-of-thumb to estimate the impact of call-writing in PM.

 

A concentrated portfolio can produce a haircut exceeding Reg-T, but PM will generally offer a lower requirement for net-short premium. It's very close to a 5% VaR if you're fairly diversified.

 

My understanding is that IB looks at the value of the position up and down 15%. Over that wide span, the PM requirement represents the maximum loss.

Because you have no other positions in this stock, there is no offset, and the requirement is the estimated loss if the stock trades up to 5.75. That's clearly less than $5,000.

But they also look at 5 standard deviation moves as well as a 15% change in implied volatility.


http://www.interactivebrokers.com/en/p.php?f=margin&p=pm&ib_entity=llc

Mark

 

FWIW when I did a bunch of SPX condors, PM was much better than regular margin. But they managed to stay far OTM.

 

Perhaps someone will check Reg-T vs. PM tomorrow on a live example. Best to use an atm option.

 

Looked seriously at PM and in theory trader could get 6 to 1 leverage. In actual trading trying to figure out what the leverage rate would be or how PM affects your trading amount always appeared unclear until after the trades were made. IOW, there seemed no way to know for sure what would happen under different scenario’s beforehand.

Seems like PM is a non factor in the trading world.

 

I suspect PM is hyped up. You may get 1:6 leverage, but that requires an almost market-neutral or broad index based porfolio. Once the hedging is skewed, the permitted leverage drops and margin shoots up. Shorting naked options is almost prohibited.

 

Short calendars are much improved over Reg-T requirement. That is where I've seen the greatest improvement in haircut.

 

Sans PM, short calendars are considered to be naked short options via Reg T.

Thus OP's observation that naked options 'appear' to boost margin. Your observation says just the opposite.

When I used PM, I was able to carry huge positions. A mixed blessing.

Mark

 

I haven't been short any calendars for months, but that's what I recall. I ran my positions via Reg-T, and my req is a hair <20% lighter under PM. A diversified account with a 60-odd ticker long-dispersion book, many individual vol and delta bets, neutral delta to SPX 900 and long small vegas to 870/930.