Understanding Portfolio Margin

Portfolio margin allows brokerages to calculate margin requirements based on the risk profile of an entire portfolio rather than on a position-by-position basis. This risk assessment includes a simulated stress test that evaluates how a portfolio would react to market fluctuations, allowing for more efficient capital usage compared to traditional margin methods. The distinction lies in the fact that portfolio margin is risk-based, factoring in the correlation between hedging positions, whereas regular margin typically adheres to a rule-based structure that may overestimate required capital for certain strategies. Consequently, traders can have lower margin requirements, especially when using longer-dated options, which allows for a more capital-efficient trading approach.