54: Can Using Portfolio Margin Enhance Your Returns?

Show notes: http://optionalpha.com/show54

If you’re an experienced options trader, then today’s show is for you because this week we’ll be talking about portfolio margin and how it could help enhance your returns. Yes, portfolio margin isn’t for everyone (you’ve got to have at least $125k in equity to qualify and three years of experience trading options), but the ability to upgrade your margin account to this portfolio risk model is incredibly powerful.

With portfolio margin, your broker is assessing each new option trade risk on the overall portfolio impact vs. an individual basis that happens in traditional margin accounts. They are asking the question, "How much risk does this new trade add to the overall portfolio?" More often than not, it means less margin required for new trades when you’ve already got offsetting positions.

So, how does portfolio margin help? Well, when you have to put up less cash in margin to hold a position that takes in the same premium, it means you can generate a higher return and free up additional capital for more positions. Still, this fairy tale could also be a curse in disguise if you don’t manage your account properly.

In today’s show, you’ll discover how brokers “stress-test” positions based on percentage moves in the underlying stock or ETF, how they think about concentration risk, and how margin “kick-backs” could increase exposure even when you exit trades. Don’t have $125k in equity and think you're going to skip this show? Better thing twice because the tips and advice in this show will put you light years ahead of everyone else as you account balance grows.