Saturday, March 16, 2013

Super trader Karen's portfolio margin

Although I don't emulate to trade Karen's strategy at the moment, some reader's comments were interesting. One comment about the Return on Margin (ROM) reminded me of the portfolio margin. Newly available from 2007, the portfolio margin gives traders more flexibility to trade bigger sizes compared with old margin requirements based on "Reg-T". TOS is one of the brokers that support portfolio margin.

For SPX/SPY, the portfolio margin fits into the following category: Large cap broad-based indices are tested with a minimum +6%/-10% price changes. Using this criteria, the Karen strangle shown below would have a portfolio margin of $3838 vs Reg-T margin of $25,283. What a difference! It bumps up the ROM dramatically, even if the minimum price changes are set as 10% to upside and -15% to the downside.
Portfolio margin is available for margin accounts (not IRA) of $125K and above only. A broker can increase its own portfolio margin requirements based on a number of criteria. I believe Karen had complained about a sudden (No advanced Notification) margin requirement change by TOS which resulted her largest loss ever. This margin requirement change she mentioned was very likely to be related to portfolio margin "minimum" stress test I believe.

Without the PM, the naked call determines the margin ($25K) for this type of strangle. The naked put has much less margin requirement ($13.5K).


  1. sounds like someone with significantly smaller amt. of capital to start with is going to have an uphill battle to do any real good.