Today, April 2, 2007, the new Portfolio Margin rules came into effect, which was the subject of a recent newsletter. The fixed Reg-T rules-based margin system in place for many years dictates that margin is utilized and calculated based upon each trade deployed and varying according to the trading strategy used. Under the Reg-T rules, the maximum amount of initial margin on a straight stock purchase is 50%.

The new portfolio margin requirements will be equal to the maximum potential loss on a portfolio based on an increase or decline of as much as 15% in the value of each investment held in the same account. Unlike the current Federal Reserve rules, the new rules will have the effect of aligning the amount of margin money required to be held in a customer’s account with the risk of the portfolio as a whole. The term “portfolio” in this context refers to securities in the same account; securities in one account will have no effect on margin in another.

I speculated in my newsletter article about what sort of suitability requirements brokers might apply for using Portfolio Margin. Under Chicago Board Options Exchange (CBOE) guidelines, expect your broker to require that there be a minimum of $100,000 in net liquidation value in your account in order to qualify for using Portfolio Margin. Interactive Brokers and OptionsXpress have both indicated to me that this will be a requirement. Other suitability requirements may be imposed as well.

So the new PM rules will not be for everyone. And for that matter, Portfolio Margin will not be automatically extended. All brokers will require an application to use it. Note that not all brokers will be able to roll PM margin out today, but Interactive and OX both should be deploying it already.

For covered call writes, epecially those involving a protective put, the margin available under the PM rules is huge. The CBOE has provided comparisons of the differences in available margin under the Reg-T and PM rules. If you’re interested and you qualify for it, check it out.

This entry was posted on Monday, April 2nd, 2007 at 1:09 pm and is filed under Covered Calls. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.