How a PMA works

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Robinhood works great!



Let's say you're an experienced trader who holds the following positions in your portfolio:

Long 100 shares of Company A (stock)

Short 5 put options of Company B (option to sell)

Short 10 call options of Company C (option to buy)

In a traditional margin account, each position would be assessed separately for margin requirements. However, with a portfolio margin account, the broker would take a holistic view of your entire portfolio to calculate the margin requirement. They would consider the potential risks and offsets between your positions.

Here's how the calculation might work:

Long Shares of Company A: This is a straightforward long stock position. The margin requirement for this position might be based on the standard Regulation T requirement of 50%.

Short Put Options of Company B: These put options give you the obligation to buy Company B's stock. Since this is a short put position, it's considered a potential liability. However, the broker's risk model might recognize that this risk is partially offset by other positions, like the short call options.

Short Call Options of Company C: These call options give you the obligation to sell Company C's stock. Like the short put position, this is also a potential liability. Again, the broker's risk model would consider the offsetting effects of other positions.

The portfolio margining system would evaluate the potential losses or gains from your entire portfolio based on various market scenarios, considering the correlations and offsets between your positions. It might determine that your overall portfolio risk is lower than the sum of the individual position risks.

As a result of this risk-based assessment, your margin requirement for the portfolio as a whole could be lower compared to what it would be if each position were considered independently. This potentially allows you to leverage your capital more efficiently.

It's important to note that this is a simplified example. In reality, portfolio margin calculations can be quite complex, especially when dealing with various types of options and derivatives. Also, the specific margin requirements and offsets would depend on the broker's risk model and the regulatory guidelines in place.

Additionally, while portfolio margin accounts offer benefits in terms of potential leverage, they also come with higher risks due to the complex nature of trading strategies involved. It's crucial to thoroughly understand the risks, consult with professionals, and have a solid risk management strategy before engaging in trading using a portfolio margin account.




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