This is the third, in a 6 part series focusing on managing a large account. The first segment was “Improving Your Odds with Options”. The second segment was “Building a Core Portfolio”. This segment is on allocating capital and using portfolio margining to reduce the margin requirements for stock and option positions. A question we get a lot is how do I allocate my capital? How can portfolio margining aid our allocation of capital and why is diversification of strategies important?
SPAN margining and portfolio margining (PM) both significantly reduce the capital requirements for stock, options and Futures positions and can increase our number of occurrences. Portfolio margining is not required for successful core investing methodologies and is only available to qualified investors. We started with a $250,000 account and invested in 7 different stocks with a cumulative notional value of $724,000. The regular margin would be $185,025 while the PM margin would be $46,100. The advantages of PM were more leverage, greater flexibility, even playing field with professionals, “cheaply” offset positions against each other, reduction of margin requirements and replicates SPAN margining.
A table comparing the margin required for a 1 Standard Deviation SPY Strangle with regular margin to a Strangle using portfolio margining was displayed. The example compared the credit received, required margin at order entry and maximum Return on Capital. Using portfolio margining almost tripled the ROC on the same trade. A table comparing the core option strategy positions listed last week with regular margin and portfolio margining was displayed. The table showed the huge savings by using PM.
Tom and Tony explained the importance of diversification of strategies used. A correlation table (3-month period) was used to show that by allocating capital using diverse strategies, such as a short Straddle, short Strangle or at-the-money (ATM) Put, against our long SPY stock, we can offset our risk. For example, while long SPY and ATM puts have high correlations, long stock with Straddles don’t. “The closer we get to the zero correlation mark, the better off we are.”
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