This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

The Brave New World of Portfolio Margining

This column was originally published on RealMoney on April 4 at 12:15 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here .

It would probably not surprise most people that institutional investors or customers with more than $5 million in their trading accounts receive preferential treatment from their brokerage firms. One of the best benefits comes in the form of reduced margin requirements, or the amount of capital required to buy or sell equity-based financial products.

But it might surprise you that as of yesterday, these same lower margin requirements became available to most individual retail traders. Oh, your broker didn't tell you that your account is no longer bound by strategy-based margin requirements and now qualifies for portfolio margining rules?

While there are many details and some quite complex rules, the big difference is that strategy-based margining looks and charges each position as a separate entity. Portfolio margining, as the name suggests, looks at the entire portfolio, taking into consideration offsetting positions in calculating the charge of margin requirement.

Huge Reduction in Capital Required

"This is one of the biggest fundamental changes to occur in the brokerage business in years," says Randy Frederick, director of derivatives at Charles Schwab. He believes it will prove to be a huge benefit for those who incorporate options into their investing strategies.

To illustrate the magnitude of the reduction in capital that will be required, let's look at some basic offsetting positions and what likely will become the two most widely used strategies: married puts and covered calls. A married put consists of long stock and long a put option on that stock.

Assume one bought 1,000 shares of IBM at $97 per share and also purchased 10 of the April 95 put options. The margin requirement under the old rules would be $49,400. Under the portfolio margining rules, only $3,650, a 92% reduction in capital, is required to establish this position. For a covered call, that is, buying 1,000 shares of IBM and selling 10 of the April 100 calls, the margin goes from $47,000 down to $12,700, a 72% reduction.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
SPY $207.70 0.95%
IBM $162.94 1.60%
SCHW $30.31 0.26%
AAPL $125.21 1.60%
FB $83.02 -0.34%

Markets

DOW 17,961.63 +248.97 1.41%
S&P 500 2,079.49 +18.47 0.90%
NASDAQ 4,922.4040 +31.1850 0.64%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs