Nobody wants his or her stock investments to be forcefully liquidated. Protect your portfolio with better estimations and risk management plans.
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.
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.
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.
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.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
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.
Use of portfolio margin involves unique and significant risks, including increased leverage, which increases the amount of potential loss, and shortened 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.
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.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, and a subsidiary of TD Ameritrade Holding Corporation. TD Ameritrade Holding Corporation is a wholly owned subsidiary of the Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 Charles Schwab & Co., Inc. Member SIPC.