Regulation t margin versus Portfolio margin which one should you use in this video you're
going to learn which type of margin is best when trading options let's get started we get started
please subscribe and click the notification bell regulation t is available for accounts
that have a minimum balance of around two thousand dollars when you sell naked options
using regulation t it's going to reduce your buying power by anywhere from 12 to 20 percent
as a result let's say you sell one contract with a strike price of a hundred dollars that means that
the notional value of that contract is going to be ten thousand dollars because the hundred
dollar strike price and one contract equals 100 shares and if you're trading regulation t
then your buying power reduction is going to be anywhere from 12 to twenty percent of ten thousand
dollars which means it's going to be reduced by twelve hundred dollars to two thousand dollars for
every contract that you sell in contrast portfolio margin which is usually available to accounts
with an account balance or net liquidation value of around 150 000 or more will usually reduce
your available buying power by around four percent to ten percent of the maximum loss
so using the same example as we did previously instead of reducing your available buying
power by twelve hundred to two thousand dollars for every contract that you sell
by using portfolio margin it'll reduce your available buying power by about
four hundred dollars to around one thousand dollars for every contract that you sell portfolio
margin stress tests your entire portfolio in aggregate as a result the further out of the money
options that you sell the less your buying power is going to be reduced so again pm or portfolio
margin looks at the risk of your entire portfolio in my opinion if you have an account balance of
over a hundred and fifty thousand dollars and i think that that number varies for each brokerage
whether it be e-trade or schwab or interactive brokers then i would definitely recommend always
using portfolio margin portfolio margin is great especially when you're disciplined because it
enables you to sell further out of the money options i remember when amazon fell below 3 200
in late september and early august of 2021 and during that time i was selling put options in
amazon with a strike price of 2200 or 2300 and my buying power was only being reduced by a few
thousand dollars per contract despite collecting around three to four hundred dollars for every
contract that i was selling portfolio margin allows you to make less risky trades and increase
your win rate without significantly reducing your available buying power you can literally
sell further out of the money options and collect premium on trades using portfolio margin that you
would not make when using regulation t because the amount of buying power that is going to be used up
when trading with regulation t might encourage you to be more aggressive with your strike selection
so that you can collect more premium additionally when you're trading using portfolio margin
when volatility is low and when the vix is trading below 15 you might be more likely
when using portfolio margin to trade further out of the money and trade naked options
as opposed to using vertical credit spreads one major drawback of using portfolio margin
especially when trading naked options is that during a large volatility expansion event your
excess liquidity has a tendency to drastically decrease as a result it's very important to
always make sure that you don't trade too large and that you always leave an ample safety net
so that you do not get hit with a margin call if the market pulls back by 15 or 20 percent because
if the market does pull back by 15 or 20 percent and the VIX increases from 15 to 40 then you don't
want to run out of buying power and be forced to close out positions at the most inopportune time
David Jaffee with beststockstrategy.com please subscribe and click the notification bell
leave a comment below and let me know your thoughts on whether you would prefer to trade
using portfolio margin or whether you would prefer to trade using regulation t