Portfolio Margin Trading Leverage & Risk Management

Traders should become very familiar with margin trading, especially since it comes in many forms. Learn about the different types of margin accounts and how you can climb up the margin ladder and make your way up to portfolio margin status.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/pulley with weight about to hit egg: managing portfolio margin
5 min read
Photo by Dan Saelinger

Key Takeaways

  • With more leverage you will need to focus more on risk management
  • Learn about the different topics that could be covered in the the portfolio margin test
  • Keep an eye on your balance and know when margin calls could be issued

Picture yourself playing a video game. First you learn the rules, then you improve your skills, and finally you try more complex strategies to get to the top level. Sounds a lot like trading, doesn’t it?

The World of Margin

Chances are you’ve heard of margin—putting up part of the cost of an asset in order to control all of it. If you’re paying only a portion of what a trade costs, think of the additional positions you could trade with more cash in your account. Margin trading can feel tempting. But you can’t just jump in. There are different levels to move through before you reach the top.

If you’re new to trading, it may be best to start with a cash account. Once you’ve been trading for a while and you’re clear about risk management, you may be ready for the second level: trading in a margin account. Over time, you may find that even a margin account may not give you enough buying power. When that happens, you may be ready for the max level: portfolio margin. Here’s where you could potentially secure up to 10 times the normal margin.

It’s a lot to tackle. Plus, you may be tested to see if you even qualify. Trading with this much margin can feel awesome when things are going your way. When they’re not, there could be serious consequences for your trading funds.

Let’s review the rules.

Level One: Cash Account

This can be a good starting point to get your feet wet. No need to use borrowed money until you know what you’re doing and you’re in a position to increase your risk. A cash account is pretty straightforward. You know how much to put up for a trade, and you calculate your profit and loss (P&L) based directly on, well, how much you made or lost.

Say PHYL is trading at $100 per share. You’d need $10,000 to buy 100 shares. If the price goes up $5 and you sell your position, you can make a $500 profit. If the price goes down $5 and you sell, you lose $500. And if you don’t have the $10,000 cash outlay, you’ll either have to look for a cheaper stock or buy fewer shares.

Level Two: Regular Margin

Using the same example, if you use a standard margin of 50%, you’d need $5,000 in your account, and you’d borrow the other $5,000 from your broker. You’d have to pay interest on what you borrowed. And if the value of the stock drops, a margin call maybe issued in your account and you may be required to deposit more cash, or shares may be forcibly sold by your broker to cover the call amount.

Now, if you also bought a PHYL 100-strike put for $3 (plus transaction costs), your total margin would increase $3, or $300, plus transaction costs. So you’d need to put up $5,300. And if the value of the stock drops, the negative effects of margin could hurt you, although the value of the put could help offset some of that loss. That’s why you’d need to sharpen your risk management skills when trading a margin account.

There are different ways to apply risk management. If you’re into charting and technical analysis, you could use support and resistance levels as guidelines to identify your entry and exit points, including stop levels. You could also change position sizes, or hedge your positions with options or safe-haven assets such as gold. Once you’ve become a pro at risk management in a regular margin account, you may be ready to move up.

Level Three: Portfolio Margin

Not everyone qualifies for a portfolio margin (PM) account. To be a “permissioned portfolio margin” client at TD Ameritrade, you need at least three years of experience trading options. You also need to have approval for writing uncovered options (tier 3 approval). You must achieve a score of 80% or better on an options test. Finally, each account must have full options trading approval and an initial value of at least $125,000 (you can’t combine smaller accounts to meet this requirement). The account’s total net-liquidating value must remain above$100,000. Remember, PM-permissioned accounts are only available for taxable (non-custodial) margin accounts.

Going back to our earlier example (buying 100 shares of stock plus an at-the-money put), in a permissioned PM account, you’d need to put up $300, plus interest. That leaves you with more cash to initiate new positions. But if that put is sold or expires out of the money (OTM), the regular margin requirements on the stock kick back in. Table 1 shows how your totals could be calculated in a cash account, versus a margin account, versus a PM account. (Keep in mind, these numbers are just to give you an idea of how portfolio margin could potentially allow you to keep more of your cash.)

100 Shares at $100Cash AccountMargin AccountPortfolio Margin Account
Stock Required Funds$10,000$5,000$0
Put Option Required Funds$300$300$300
Total Position Cost$10,300$10,300$10,300
Total Paid$10,300$5,300$300
Amount BorrowedNone$5,000$10,000

. Portfolio margin may allow you to get more with less, but the leverage can work both ways. You could lose money faster than you can say “margin call.” For illustrative purposes only

Prep for Portfolio Margin Test

Ready to study? Read this four-part series of articles that can help you prepare for the different topics covered on the test.

Part 1: Capiche? Leverage into a Margin World

Part 2: Capiche? Greeks, Unveiled

Part 3: Capiche? Profit, Loss, and Expiration

Part 4: Capiche? Risk Management and Margins

Table 1 describes PM in the simplest way, but it’s actually more complicated, with many variables to consider. The higher leverage means you’ll need to be savvier in your risk management and be aware of increased sensitivity to price changes. You don’t necessarily need to know all the math that goes into options-pricing models. But you’ll need to explore what’s behind options prices.

The one big difference between a regular margin account and a PM account? The funds you’re required to allocate to your positions aren’t based on individual trade risk but rather on total position risk. Stock and options positions are tested by hypothetically moving the price of the underlying. So if you make a trade that partially or wholly offsets your risk in another one of your trades, you may only have to put up enough funds to cover the net risk instead of the sum of the individual risks.

The largest loss a position could theoretically have is calculated by an algorithm that determines how much a position might lose if the underlying price and volatility changes. Luckily you don’t have to figure it out yourself, but you should know that when your options contract expires, it’ll be either OTM or in the money (ITM). If it’s OTM, then it’s worthless. If it’s ITM, it’s worth its intrinsic value (the difference between the stock price and the strike price of the option). You’ll likely receive that value if you sell your long ITM options position before expiration (or pay that value if you buy to close your short ITM option). And what if you don’t?

Chances are it’ll be exercised (if you’re long) or assigned (if you’re short). ITM long calls and short puts become long stock. ITM short calls and long puts become short stock. If you’re long an option and the strike price is the same as the stock price at expiration, let your broker know if you intend to exercise the option. If you’re short the option, then assignment will depend on what the long option holder intends to do. Keep this in mind if you trade in a PM account.

Margin Call: Is It the End All?

Margin calls in a PM account can be issued anytime the account has fallen below the firm’s margin requirements. To meet margin requirements, you can deposit cash or marginable securities, close existing positions to reduce the overall margin requirements, or open trades that would create cash or reduce margin requirements. Remember, margin calls may have up to two days to be met, or they may be due immediately based on market conditions.

Margin is easy to abuse, but if used wisely, you could potentially achieve the results you want.

How to Check Your Margin Balance

You’ll need to look at your maintenance excess (net liquidation value – margin requirements) periodically. On the thinkorswim platform from TD Ameritrade, select the Monitor tab, then look under Position Statement to see your buying power. If it shows negative buying power, your account may be in a margin call. And if you have a portfolio margin permissioned account, you can check the BP effect of a trade on the order confirmation dialog box before you place a trade.

Jayanthi Gopalakrishnan is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.

Key Takeaways

  • With more leverage you will need to focus more on risk management
  • Learn about the different topics that could be covered in the the portfolio margin test
  • Keep an eye on your balance and know when margin calls could be issued

Do Not Sell or Share My Personal Information

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

Jayanthi Gopalakrishnan is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.

Use of portfolio margin involves unique and significant risks, including increased leverage, which increases the amount of potential loss, and shorter and stricter time frames for meeting deficiencies,which increases the risk of involuntary liquidation.Client account and position eligibility requirements exist and approval is not guaranteed.

Carefully read the Portfolio Margin Risk Disclosure Statement, Margin Handbook, and Margin Disclosure Document for specific disclosures and more details


Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

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