Capiche: Portfolio Margin Part 4—Risk Management and Margins

Nobody wants his or her stock investments to be forcefully liquidated. Protect your portfolio with better estimations and risk management plans. margin part 4—risk management.
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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.

The Dreaded Call

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, close existing positions to reduce the overall margin requirements, or open trades that would create cash or reduce margin requirements. 

If closing positions, you can choose which to close to reduce margin requirements, as long as they’re done by the close of trading when the call is due. But if you’re opening a trade, it would have to be in the same symbol as one of your current positions, in order to increase cash or reduce risk. For example, if you open a short call trade against a long stock position, it doesn’t increase the position’s risk (and so doesn’t increase the margin requirement). But it does increase the cash balance, so it’s allowed. Opening a long put trade against a short naked put position decreases the risk of the position. And if it decreases the position’s margin requirement, the trade would be allowed. But if you’re long 100 shares of stock XYZ, you could sell one call in XYZ if your account was subject to a margin call. You couldn’t sell two calls, for example, because the risk of only one of the short calls is covered by the long 100 shares.

Also, if the net liquidating value of your account drops below minimum PM levels, the margin requirements may revert to regular margin requirements, which could be higher than PM margins, and thus result in a margin call. 

Get In Touch

If your Position Statement on the thinkorswim® platform from TD Ameritrade shows negative buying power, your account may be in a margin call. In that case, call the Trade Desk at 866-839-1100 for assistance. They can clarify what is and isn’t allowed in the account, and help possibly avoid forced-position liquidations. 

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