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# Capiche: Portfolio Margin Part 4—Risk Management and Margins

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October 2, 2017
Dan Saelinger

Let’s assume you hold a portfolio margin (PM) account. The amount of capital required to open or hold a trade—its margin requirement—can be significantly lower than what’s required for a regular margin account. That’s because the margin requirement for a position in a PM account is based on a position’s risk within a certain range of the underlying stock or index price.

## Mapping It Out

For example, if the PM requirement for a long stock position is based on its max loss within a +15%/-15% price range, you can estimate the loss by multiplying the value of the stock position by 0.15 to arrive at the PM requirement.

Say you were long 1,000 shares of stock that had a price of \$75. The value of that stock position is \$75,000. Using a +15%/-15% PM test, \$75,000 x 0.15 = \$11,250. That would be the PM requirement and the position loss if the stock price dropped 15%.

With options, the PM requirement tests theoretical values based on a range of the underlying prices and volatility. But the max loss of a long option position, for example, can be calculated with an option’s prices. If you were, say, long 10 of 75 straddles, which would be long 10 of the 75 strike calls for \$3, and long 10 of the 75 strike puts for \$2.75, the value of that straddle position is \$5.75 x \$100 x 10 = \$5,750. You add up the options prices in the straddle, multiply that sum by the options’ contract multiplier (usually 100 for standard options), then multiply that by the number of straddles.

So the total value of the straddle position is its max potential loss, as well as the traditional “non-PM” margin requirement. And the PM requirement for that long straddle may in fact be smaller.