Portfolio Margin vs. Regulation T Margin

Risk-based margin is a way of calculating margin requirements based on a position's potential risk. In the past, traders had to be market makers with access to the exchange floor to use risk-based margin. Today, qualified Schwab clients can access a type of risk-based margin known as portfolio margin.

Before continuing, it's important to understand that portfolio margining involves a great deal more risk than cash accounts and is not suitable for all investors. Minimum qualification requirements apply, and portfolio margin is not available in all account types.

Portfolio margin computes real-time margin for stock and options positions based on the risk of each trade as well as a trader's overall portfolio risk, rather than the fixed percentages and strategy rules associated with Regulation T margin. Also known as Reg T, this is the initial margin requirement set by the Federal Reserve Board in 1934 in response to the 1929 market crash. According to these requirements, an investor or trader may borrow up to 50% of marginable securities that can be purchased (such as most listed stocks). Each position is evaluated individually and does not consider other portfolio risks.

Portfolio margin at Schwab, however, uses theoretical pricing models to calculate every position's theoretical real-time losses at different price points above and below the current underlying price. The largest theoretical loss identified is the margin required for the position. Portfolio margin also views a trader's account holistically, taking into account things like hedged positions.

Schwab uses two methods to dynamically incorporate implied volatility (IV) into the risk array:

1. "Sticky Strike" (constant IV): Each options strike price uses a constant IV in the options-pricing model to calculate theoretical options prices at each evaluation point of the risk array. (IV does not change over each price slice.)

2. "Modified Sticky Delta" (IV with slope): IV is based on the in-the-money/out-of-the-money amount of the options with respect to its evaluation point. We assign a slope and adjusted volatility to each price point.

Please note: IV for the current price is not adjusted in the Modified Sticky Delta or Sticky Strike method. Of the two methods used, the risk array yielding the highest theoretical loss is applied for the margin requirement.

Portfolio margin often has lower margin requirements and increased leverage compared to Regulation T margin requirements and may be preferred by sophisticated and active traders.