Option Traders: How Portfolio Margin Works

March 6, 2024 Advanced
Portfolio margin is available to qualified Schwab clients who have a margin account and meet the requirements. Learn more about what it is, how it works, and the risks involved.

Margin is a broad topic with many approaches, benefits, and risks. For qualified accounts, portfolio margin can be used to offset a measure of risk by consolidating—also known as netting—a trader's positions to account for their portfolio's overall risk.

Some experienced traders with well-diversified portfolios who are risk hedgers and use options as part of their overall trading strategy choose to use portfolio margin because it can translate to more buying power in their account. That can potentially help create more opportunities to diversify or create a buffer when markets turn volatile.

However, lower margin requirements also add more leverage and more risk.

Here's a look at how portfolio margin works and what using portfolio margin might mean to an individual trader.

What is portfolio margin?

With portfolio margin, stock and options positions are tested by hypothetically moving the price of the underlying generally between +/– 15%.

These price ranges are then divided into 10 equidistant points, and the loss or gain on the position as a whole is calculated at each of the 10 points. These 10 points are also called scenarios or risk array.

A portfolio margin calculation uses an industry-standard options pricing model and stress testing. Testing is done on a position's implied volatility(IV), and the margin requirement will be equal to the largest loss calculated for any given scenario. Below is an example of margin requirements in different scenarios in an underlying stock.

Example of portfolio margin requirements
Table displays margin requirements, using portfolio margin, in different scenarios, on an underlying stock. The risk-based minim
Price move -15.00% -12.00% -9.00% 9.00% 12.00% 15.00%
XYZ 138.431 143.3168 148.2026 177.5174 182.4032 187.289
Margin Req ($2,442.90) ($1,954.32) ($1,465.74) $1,465.74 $1,954.32 $2,442.90
Minimum RBM $0.00
PNR -30.00% 30.00%
P/L at EPR ($4,885.80) $4,885.80

A trader using portfolio margin is generally allowed 6.6-to-1 leverage for stock positions. Importantly, trading with greater leverage involves greater risk of loss. Because of this, portfolio margin requirements are calculated in real time.

Hedged positions may have lower margin requirements than unhedged positions. Hedging strategies are generally used to reduce, or hedge, risk associated with price movements in an underlying. For example, long 100 shares of XYZ at 134~ + long a 133 XYZ put is a hedging strategy that combines a long stock with a protective put, also known as a married put. Additionally, positions that are concentrated will be evaluated using a greater range in the underlying, and the requirements on these positions will be greater in comparison to nonconcentrated positions.

The table below displays an example of a hedged position, or a long stock with a protective put.

Table displays an example of a hedging strategy.
Strategy Qty Symbol Exp Strike Type Margin Req PNR EPR
Married Put +1 ZYX 23 SEP 22... 133 PUT $1,403.00 -25.00%...+25.00%

This table displays an example of a hedged position using portfolio margin.

The table displays an example of a hedged position using portfolio margin.
Price move -15.00% -12.00% -9.00% 9.00% 12.00% 15.00%
ZYX 113.6535 117.6648 121.6761 145.7439 149.7552 153.7665
Sticky strike $583.50 ($536.78) ($462.00) $832.97 $1,172.39 $1,532.01
Sticky delta ($567.73) ($524.86) ($455.03) $838.71 $1,179.25 $1,539.05
Minimum RBM $37.50
EPR -25.00% 25.00%
P/L at EPR ($612.26) $2,812.67

How does portfolio margin account for IV and concentration?

IV is usually incorporated into the risk array used in portfolio margin calculations. Schwab uses two methods to dynamically incorporate IV into the risk array:

  • Sticky strike (constant IV): Each options strike uses a constant IV in the options pricing model to calculate theoretical options prices at each evaluation point of the risk array. This means IV does not change over each price slice.
  • Adjusted sticky delta (IV with slope): IV is based on the in-the-money2 (ITM)/out-of-the-money (OTM) amount of the options with respect to evaluation points. A slope and adjusted volatility is assigned to each price point. However, IV for the current price is not an adjusted sticky delta or sticky strike method. Of the two methods used, the risk array yielding the highest theoretical loss is applied for the margin requirements.

The table below illustrates both of these two methods.

This table shows the risk array and margin requirements for both sticky strike and sticky delta, as well as volatility changes.
Price move -15.00% -12.00% -9.00% 9.00% 12.00% 15.00%
XYZ 137.8615 142.7272 147.5929 176.7871 181.6528 186.5185
Volatility 45.98% 45.98% 45.98% 45.98% 45.98% 45.98%
Sticky strike ($1,373.26) ($1,009.88) ($689.12) $339.23 $399.15 $441.56
Volatility 49.88% 48.37% 47.29% 45.23% 45.20% 45.19%
Sticky delta $1,425.20 $1,049.80 ($716.08) $342.75 $401.34 $442.19
Minimum RBM $37.50

Concentration is part of the calculation as well. Schwab uses proprietary logic to make this calculation. The two main terms used in this calculation include:

  • Expected Price Range (EPR): The firm's estimate of the maximum expected one-day price range for a given underlying security.
  • Point of No Return (PNR): Percentage move in an underlying price in which an account will lose 100% of its equity (Net liquidation value = $0). Beyond this point, the account will become unsecured. PNR does not include equity in a futures account or cross-product correlations.

If the PNR is outside of the EPR, then the risk array will generally default to the Theoretical Intermarket Margining system (TIMS) minimum margin percentage. This applies to both up and down movement. For example, if upside PNR is 60% and EPR is 50%, then margin will generally default to TIMS. Similarly, if downside PNR is –50% and downside EPR is –30%, then margin will generally default to TIMS.

Under the TIMS methodology, equity positions are generally stressed at plus or minus 15%.

If PNRs are outside of the EPR, then the house risk array is used, generally with TIMS percentages. Now, if the converse occurs, that is, when the PNR is inside the EPR range, then a risk concentration exists, and action is taken in real time to increase the portfolio margin requirement. When concentration exists, the margin requirement will be set to the EPR. For example, if upside PNR is 30% and upside EPR is 40%, then the margin requirement will use 40% EPR to calculate the risk array even if the TIMS minimum may be 15%.

The thinkorswim® platform includes PNR and EPR in the Explain Margin window for both portfolio margin and Reg T accounts. The risk arrays used for portfolio margin requirements may also be raised due to low liquidity and market events. The table below displays the PNR and EPR used in a portfolio margin calculation.

This table displays the PNR and EPR used in a portfolio margin calculation.
Price move -15.00% -12.00% -9.00% 9.00% 12.00% 15.00%
XYZ 138.431 143.3168 148.2026 177.5174 182.4032 187.289
Margin Req ($2,442.90) ($1,954.32) ($1,465.74) $1,465.74 $1,954.32 $2,442.90
Minimum RBM $0.00
EPR -30.00% 30.00%
P/L at EPR ($4,885.80) $4,885.80

What does portfolio margin mean for traders?

On thinkorswim, traders can see requirements and analyze current positions or simulated trades and positions as well as get real-time portfolio margin requirements.

The thinkorswim platform offers access to historical daily securities prices. To access these prices, log in to thinkorswim, and under the Analyze tab, turn on the thinkBack function, which allows traders to view historical pricing, IV, and the greeks. It's also possible to analyze simulated or existing trades and positions using standard industry options pricing models. In addition, traders can change components, including underlying price, increased/decreased volatility, time to expiration, interest rate, and dividend yield to calculate the theoretical price of the options and estimate portfolio margin requirements.

How do traders qualify for portfolio margin?

Portfolio margin is available to qualified Schwab clients who currently have a margin account and meet the requirements outlined below:

  • $125,000 in current equity
  • Full options trading approval
  • Must achieve a score of 80%, or better, on an options test
  • If approved, the account's total net liquidated value must remain above $100,000

Approved clients also receive 24/7 account support and free access to trading specialists for help with executing their strategies.

Portfolio margining involves a great deal more risk than cash accounts and is not suitable for all investors. Minimum qualification requirements apply. Portfolio margining is not available in all account types.

Use of portfolio margin involves unique and significant risks, including increased leverage, which increases the amount of potential loss, and shortened and stricter time frames for meeting deficiencies, which increase the risk of involuntary liquidation. Client, account, and position eligibility requirements exist, and approval is not guaranteed.

Carefully read "The Charles Schwab & Co., Inc. Guide to Margin" for more details. For specific questions, please contact us at 877-752-9749.

1The market's perception of the future volatility of the underlying security directly reflected in the options premium. Implied volatility is an annualized number expressed as a percentage (such as 25%), is forward-looking, and can change.

2Describes an option with intrinsic value (not just time value). A call option is in the money (ITM) if the underlying asset's price is above the strike price. A put option is ITM if the underlying asset's price is below the strike price. For calls, it's any strike lower than the price of the underlying asset. For puts, it's any strike that's higher.

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options" before considering any options transaction. Supporting documentation for any claims or statistical information is available upon request.

When considering a margin loan, you should determine how the use of margin fits your own investment philosophy. Because of the risks involved, it is important that you fully understand the rules and requirements involved in trading securities on margin. Please read the Margin Risk Disclosure Statement for more information.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.