What is portfolio margin?

Portfolio margin is a method for calculating margins in securities trading that differs from the traditional approach of calculating margin requirements for each individual order. Instead, portfolio margin takes into account the overall risk of a user's entire portfolio to determine the required margin. In options trading, for example, if opening a position can hedge the risk of existing holdings, the margin requirement for that position will be reduced or offset accordingly. This allows users to trade with a lower margin requirement, significantly improving capital efficiency.

In what trading scenarios can portfolio margin be used?

Longbridge currently supports selling call options (short call) with long positions in the underlying stock to create a covered call position, or selling put options (short put) with short positions in the underlying stock to create a covered put position. In both scenarios, the margin requirements for short calls and short puts can be reduced or offset.

For example:

Suppose a user currently holds a long position of 200 shares of XYZ.US in their account. If the user decides to sell call options (short call) on XYZ with any expiry date and strike price, and the quantity is less than or equal to 2 contracts (1 contract equals 100 shares of the underlying stock), no margin is required to execute the order. After selling the options, a covered call position will be created in the account and the margin will be calculated based on the portfolio margin requirements. However, if selling call options exceeds 2 contracts, the excess will be subject to normal margin requirements.

The same applies to creating a covered put position. Suppose a user currently holds a short position of -200 shares of XYZ.US in their account. If the user decides to sell put options (short put) on XYZ with any expiry date and strike price, and the quantity is less than or equal to 2 contracts (1 contract equals 100 shares of the underlying stock), no margin is required to execute the order. After selling the options, a covered put position will be created in the account and the margin will be calculated based on the portfolio margin requirements. However, if selling put options exceeds 2 contracts, the excess will be subject to normal margin requirements.

The formula for determining the number of options contracts that can form a portfolio is as follows: Round down (Available holdings of the underlying stock ➗ Number of shares of the underlying stock corresponding to one option contract). For instance, if the available holdings of underlying stock are 250 shares and one option contract corresponds to 100 shares of stock, the number of options contracts that can form a portfolio will be = Round down (250➗100) = 2 contracts.

The table below, using covered call as an example, illustrates the difference between portfolio margin and traditional margin in the same trading scenario.

Considering the options for the stock XYZ.US, where each contract corresponds to 100 shares of the underlying stock. To illustrate, let's examine a non-0DTE option with a set order price of $5.00.

What impact does increasing or reducing positions have on positions created through portfolio margin?

Increasing positions in the underlying stock will not impact existing covered call / covered put positions. In fact, it may enhance the quantity of short call or put options that can be sold since it increases your holdings of the underlying stock. However, reducing positions in the underlying stock may result in insufficient quantity of the underlying stock in the created portfolio, possibly leading to naked short options. In such instances, the account's margin requirements will be recalculated.

Regarding zero days to expiration option portfolio, is there any additional margin or risk of a margin call?

No, if the options have already formed covered calls or covered puts with existing holdings in the account, the necessary quantity of the underlying stock for exercising the options will be frozen on the expiry date to prepare for exercise without increasing the margin requirements.

Will holding an options portfolio affect my margin calls?

No, whether in portfolio margin mode or traditional margin mode, margin call is determined by a unified formula accessing whether the account margin is sufficient to meet the margin requirements and deciding whether to trigger a margin call.

If corporate actions of the underlying stock affect the options, will they also affect my portfolio margin?

In the event of corporate actions such as stock splits or consolidations, the options will be adjusted accordingly, but this will not affect your portfolio margin.

For example, if you originally held 500 shares of the underlying stock and had 5 short call contracts, and then the stock underwent a 5-for-1 split, reducing your shares to 100, the contract size of the options would also adjust from 100 to 20 (meaning 1 option contract now corresponds to 20 shares of the underlying stock). This adjustment will still satisfy the covered call requirement of 5 contracts.

How does the portfolio prioritize positions when holding multiple option contracts with fewer shares of the underlying stock?

When holding multiple options contracts but lacking sufficient shares of the underlying stock, the system dynamically prioritizes the option contracts with higher margin requirements to form a portfolio, thereby minimizing the buying power utilized in the account.

For example, suppose you currently hold 100 shares of the underlying stock and have one out-of-the-money short call option (referred to as Option A) with a single contract margin requirement of USD 500. As Option A is already part of your portfolio, the margin requirement for options in the account is now 0. Now, if you decide to purchase one in-the-money short call option (referred to as Option B) with a single contract margin requirement of USD 600, once Option B is executed, the system will dynamically prioritize Option B for the short call due to its higher margin requirement. As a result, Option A will become a naked short option, and the margin requirement will be reduced to USD 500 (for Option A, with Option B being part of the portfolio and exempted).