Alan Ellman

About the Author Alan Ellman

The Blue Collar Investor was NOT a brilliant idea of mine…,it just happened! I was a frustrated blue collar investor just like you. I attended a top tier High School, College and Dental School. All those years of education and I knew NOTHING about the Stock Market or investing in general. Our education system failed us! I investigated full service brokers, analysts, mutual fund managers, friends, relatives, colleagues and media experts. Would any of these people lead me to the Promised Land? The answer, for varied reasons, was a resounding NO I used the power of self-education to accomplish my mission of becoming an accomplished stock market investor. I used the same blueprint that I adapted to become a licensed General Dentist, a Certified Personal Trainer, and a Licensed Real Estate Agent. Year after year, my portfolio generated higher returns than those of the average Stock Market. When I started selling options, those returns increased exponentially. GETTING STARTED: In 2006 I was invited to speak before a group of 250 Real Estate Investors about some successful property investments I had fashioned. When I mentioned that I purchased my first investment property with the profits earned from selling stock options, the floodgates opened! Endless numbers of calls and emails asking me to explain how I do this.

What Is Portfolio Margining?

Covered call writing and selling cash-secured puts are conservative strategies for risk-averse retail investors. This is why I feel most of us should be trading in cash accounts (no borrowing) and sheltered accounts whenever possible. For those of us who have higher -risk-tolerance and are experienced investors looking for higher returns, margin accounts may be appropriate.

A margin account is a brokerage account where the broker lends money to the investor to purchase stocks or ETFs. The loan is secured by account stocks and cash. The investor may be required to deposit additional cash or sell some shares should the stock price decline. By using borrowing as leverage, gains and losses are magnified. Let’s have a look at margin requirements under traditional and more recent SEC-requirements:

Regulation T or Reg T

This is the Federal Reserve Board’s regulation that governs the amount of credit a broker may extend to its clients for the purchase of stocks or ETFs. According to Reg T we may borrow up to 50% of the purchase price of these securities. This is known as initial margin. The New York and Nasdaq Stock Exchanges also require a minimum margin of $2,000.00 or the full cost of the purchase, whichever is less. A maintenance margin of at least 25% of the total market value of the securities is required at all times, not just when purchased. Many broker-dealers require higher-than-minimum initial and maintenance margins.


Portfolio margining

Under SEC-approved Portfolio Margin rules certain customers can increase the leverage beyond Reg T requirements. The way it works is that highly correlated securities can be offset against each other when calculating margin requirements. For example, if a stock is purchased along with a protective put, Reg T rules would require a deposit of 50% of the value of the stock plus 100% of the purchase price of the put. However, when portfolio margining is used for the calculations, the decrease in overall portfolio risk would also result in a lower margin requirement.

With portfolio margining, margin requirements are accomplished utilizing a risk-based pricing model that calculates the largest possible loss for each position. This model is known as the Theoretical Intermarket Margining System (TIMS). Each night, the Options Clearing Corporation uses this model to distribute TIMS parameter-requirements information to participating brokerage firms. The specific requirement per portfolio will reflect the actual risk of the positions in the account and may be higher or lower than the traditional Reg T requirements.


Who is eligible for portfolio-based margining?

Not every investor is eligible for margining and requirements are broker-based usually requiring a certain minimum amount of cash in the account, a certain net worth and a minimum level of trading experience. Check with your broker for the specifics of your situation.


Goal of portfolio margining

In the end, the margin requirement will be based on the specific risk and trading strategy of our portfolios and will allow us to be margined in a way similar to professional traders. Let me re-emphasize that in my humble opinion, most of us should be trading in cash accounts.

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