Portfolio Margin is a power tool I use to make options trading more efficient in terms of buying power. If you are serious about using options to fund your freedom listen up because I believe Portfolio Margin should be your longer-term goal. Here at Good Kids Trading, I believe in demystifying the world of options trading, making it accessible, and empowering you to build a path to passive income. Today, I’m discussing Portfolio Margin I’ll be abbreviating it as PM going forward.
All options trading begins with a margin account. If you aren’t clear what a margin account is it is essentially a line of credit from your broker. Don’t think of margin as a negative, it's the same as carrying a credit card balance. Margin is a key to unlocking trading potential because you can leverage your cash for assets. There are right and wrong ways to use margin of course. In a regular margin account, you get some buying power, but it's limited. Not many traders even realize there is a more powerful and favorable margin type available. Only more advanced traders learn about this, I want you to get a jump start to where you start thinking about Portfolio Margin.
PM gives you risk-based margins similar to a market maker, without having to own a seat on the trading floor. Instead of calculating risk on fixed percentages like regular margin allows you to borrow up to 50% of marginable securities, PM uses theoretical pricing models to calculate the real time losses of a position. I realize my last few sentences might sound complicated so let me simplify it just a bit. PM gives you more power to take trades using far less buying power.
In true GKT fashion I must remind you of part of our motto to trade small. Just because you can make a large amount of trades with minimal impact to your buying power it does not mean that you should! PM is definitely not suited for all traders, you are accepting the ability to take more risk, but if you use this correctly you will actually open up far more trades that you normally would not be able to take because you buying power is tied up using a set percentage that doesn’t account for probabilities and statistics. You can take higher probability trades more often as long as you understand the worst case scenario.
You might be thinking: “sign me up right now”, all brokers have minimum capital requirements to apply for PM. Normally you need more than $150,000. Also, with great power comes great responsibility – you need to know what you're doing. Some brokers ask you to complete a test that gives you slight flashbacks to the standardized tests back in school. The broker wants to make sure you understand options because they are going to allow you to make trades that have higher risk and allow you to use more leverage.
To be clear, just because PM allows you to make these trades, it doesn’t mean you have to or that you sould. In fact, that’s not why I’m urging you to make PM your longer-term goal.
Simple options trades also benefit from PM.
Let’s use a simple naked put as an example:
Selling an Apple 165 put that expires in 42 days uses up $1,948 in a normal margin account.
That same put uses $1,124 in a portfolio margin account.
This is a savings of $824. Remember the amount of REAL risk is identical, if apple goes to zero you are risking 16,500-premium received.
So we don’t want to over leverage by selling 2 puts instead of 1. We just want to benefit from the reduction in buying power. The less buying power you use the less interest you are paying the broker, you have that other capital to find another trade. Diversification is our friend at GKT.
I can’t stress this enough, PM is a powerful tool in increasing your accounts efficiency, but the broker won't babysit you. You can set up risky and intricate trades, but if you're not sure of your game plan, you might find yourself over-leveraged. The broker won't be your safety, they may not stop you from making a trade or giving you a warning. They will margin call you if all your trades start going wrong. That is why it’s important to use PM responsibly and keep your trades small.
For options traders eyeing that transition from a regular job to financial independence, Portfolio Margin is the goal. PM evaluates your actual positions and accounts for the Intricacies of your trades. If you own a stock and buy a long put, it recognizes that you have a safety net – the ability to sell your shares at the long put's strike price and updates your buying power accordingly.
In the world of options trading, portfolio margin is a game-changer, a boost to elevate your options trading journey. If you're ready to explore this and other options strategies, check out Good Kids Trading for free information and real-time trades on our Discord. Let's navigate the markets together and unlock the potential of options trading.
If you want more information you should join the GKT discord to discuss more and connect with like minded people who trade the stock market! I hope this article was valuable to you. We want to help educate and show you trading doesn't have to be complicated, and you can do this. Happy Trading Good Kids!
Disclaimer: this is NOT financial advice. I’m basically just some dude on the internet who’s been trading a while, and I use the stock market as my primary source of income. None of this is financial advice it’s purely educational!