Portfolio Margin

Discussion in 'Trading' started by Whistlingleaf, Jul 5, 2012.

  1. So I have to admit the commercials from IB talking about leveraging up and paying only ~1.5% interest have piqued my interest enough that I'm looking into PM strategies, but finding very little on the internet.

    (Links to any blogs, books, discussions anywhere would be appreciated.)

    My working theory would be to to take 200k and borrow 400K, so I'd have 600k to work with and earn interest of 6-8+% on many securities.

    Corporate Bonds are not eligible for PM. There is a post somewhere from an IB rep which explains why ~

    According to IB any normally listed security (NYSE, AMEX, NASD) which is eligible for Reg-T is also ok for PM (minimum Market Cap 250M).

    A post I read on Yahoo says Preferred Bonds are not ok for PM, but IB told me they were - anyone with answer on this ?

    (Are some prefd's not ok cause they don't have a market cap ? If you look at Yahoo some prefd's show the market cap of the underlying, but most don't ~ look at AEV or ISG.)

    Of course Prefd bonds have ETFs, but they are not well diversified most having ~80% exposure to financial stocks.

    And there are lots of other high yielding securities mReits, MLP's, CEF's and etc, but

    The real question is how do you hedge a downfall in the market ?

    Do you hedge a rise in interest rates by owning TBT ?

    I've done very well hedging my portfolio over the past couple years using inverse ETFs and selling calls. Anyone doing this with PM do you have percentages you're targeting ? How does your portfolio break down ?

    (I hope this topic doesn't turn into a discussion on IB and frankly I would prefer not to mention them by name but afaik they are the only broker offering such a low interest rate at least for low-end retail customers.)

    Any thoughts or tidbits appreciated ~
  2. You'll be subject to margin/liquidation issues if it gets volatile again. I wouldn't lever up too much. The much mentioned 6:1 PM is for a very diversified portfolio. You won't get it if you just have a few positions, and I don't think you get any relief for long-short equity unless they're ETF's. Hard to figure from the rules, but they do have a TWS demo that you can simulate it.
  3. Do you have an opinion about the instruments you're going to invest in, or are you just looking to play the yield curve, ie. borrow short, invest long duration.
  4. Maverick74


    That is probably the dumbest thing you can do with portfolio margin. Portfolio margin was created primarily for options trading, not leveraging stock or ETF's. It was meant to give professional traders the same benefits of trading in a JBO.

    Sorry for the blunt reply, just trying to help.
  5. Well and the other issue that if you hedged away the market and interest rate risk there'd be very little return left.
  6. What on earth are you on?

    Stock margin was subject to Regulations from 1930s...
    Until they were finally updated in the form of PM.

    And PM is not for "leveraging"...
    It allows you to build a hedged Portfolio...
    And gives you relief because you are largely Market Neutral...
    Similar to the way NASD haircuts have worked for decades.
  7. Maverick74


    No. I was in Chicago at the Union League Club when they were first introduced to the public. Fimat was the first firm to offer it. I sat through all the presentations as they explained how portfolio margin was to be used and the comparisons to risk based margin in JBO's.

    Portfolio margin was NOT created for stock margin. In fact, not only was it not created for stock margin, but when it was first introduced, they didn't even allow for stock leverage, it was for margin relief when options were used to hedge stock. Then as more and more professional trading firms got in the act, they hyped up all the ways in which it could be used and portfolio margin became more liberal in use.

    It was in essence created to replicate risk based haircuts that floor traders and JBO members had for years. They wanted a level playing field. Even to this day, most brokers, IB included, impose additional restrictions for those using PM strictly for stock through the implementation of concentrated positioning.

    I'm not on anything, thanks.
  8. 1245


    I think you're correct, that the strategy is not great. However, PM was designed for both equity and options trading to provide risk based margin to experienced traders with higher levels of capital in a customer account. Not just options. Using the leverage to trade equities and etfs either during the day or overnight was also what the SEC/Finra was offering. In fact, there is a great advantage day trading equities in a PM account if your capital is over $5M. The broker does not have to monitor leverage and margin during the day, only at the close. So, if the Prime Broker allows it from a risk standpoint, you can use as much leverage with over $5M as you want.
  9. 1245


    This is not correct. PM is exactly for providing more leverage. It's a risk based margin rather than cash based. You can take on much bigger positions. If you're not experienced and don't understand risk, it's not a great idea. It takes into account volatility and probability. These guidelines are often not enough. You'll notice that there is almost a stock a day up or down more than 30%. If the stock trades with a volatility of under 40, PM only looks +/- 15%.

    If you think everyone using PM is always hedging, that's just not true. Many just sell naked options.
  10. Maverick74


    Yeah the 5 million daytrading rule was added later though and IB was the only broker in the country offering it until recently. I'm not saying one can't leverage stock, it was created to help those trading options "with" stock. And to crystallize that point almost all brokers who offer PM require an additional risk outlay for straight stock trading. In other words, portfolio margin was what the clearing firm offered for those accounts to the broker and the broker added an additional margin requirement on top of that. Most brokers refer to this as concentrated margin. If one was running a large portfolio obviously they would get the most generous relief on margin.
    #10     Jul 5, 2012