Duration: 13:38

Level: Advanced

The Main Goals:
How margin trading works for stocks, options, and bonds; and margin requirement mechanics for securities and the key distinctions.

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Study Notes:

Margin Trading in Stocks

When trading stocks in a Reg T margin account, the margin requirements are formulaic. One of the factors in
determining the margin requirements is what side of the trade you are on. If you are purchasing stock you will have
different requirements then if you are shorting the stock.

  • Long Market Value – The current market price of all positions in the account
  • Short Market Value – The current market value of the positions that have been sold short
  • Debit Balance – The amount the customer has borrowed and owes the brokerage firm
  • Credit Balance – The cash on deposit in the account
  • Equity – The investor’s ownership interest in the account
  • Excess Equity – The amount of equity in the account that exceeds the maintenance margin requirements
  • SMA – Special Memorandum Account, a line of credit that is established by the broker dealer in accordance with Reg T.
  • Buying power – This is based on your SMA and reflects an account’s ability to purchase additional investment products.

Options Margin Trading

  • Some strategies require deposits of the full purchase price and some require smaller amounts or none depending on the type of order and the other collateral you maintain in the account.
  • Under Reg T, buying a basic call contract requires a 100% payment of the premium. IB requires this to be in the account at the time of the order.
  • Conversely, writing covered call option contracts requires no deposit at all because they are being secured by underlying securities you own as a collateral.

Note: At IB, there are certain exceptions in which you are required to deposit margin. Naked options or other more complex option strategies that combine multiple legs of different contracts will often require margin to secure the contracts. These margin requirements will have minimum requirements associated with them.

Bond Margin Trading

Bond margin requirements can vary depending on whether the bonds are corporate, government, or municipal and whether they are high yield or high quality bonds. Unlike corporate bonds, Government and municipal bonds are Reg T exempt but all three types may be purchased in a margin account. Trading on margin uses two key methodologies: rules-based and risk-based margin.

  • Margin for US government debt instruments are based on a percentage of the market value of the security depending on the maturity date.
  • Margin for municipal securities and corporate securities are going to be a percentage of market value depending on the investment grade of the security.
  • Special margining considerations can be made for bonds in the form of haircuts. Haircuts are the difference between the market value of a security and the collateral value of the security, and are a reflection of the lender’s perceived risk.

Portfolio Margin Trading

Portfolio Margin is a form of risk-based margin and can be considered a more sophisticated way of assessing risk in a margin account. The methodology is based on the assumption that combinations of positions are being established by investors which have offsetting risk characteristics. For example, stocks and option hedges, arbitrage pairings, long and short indices.

The benefit is that portfolio margining allows clients to use a greater amount of leverage for their given amount of capital compared to Reg T, assuming the account is appropriately hedged.

As a real world example, traditionally hedge funds will be frequent users of this practice to establish greater leverage for their investment strategies.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Supporting documentation for any claims and statistical information will be provided upon request.

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Margin Trading

Trading on margin is only for sophisticated investors with high risk tolerance. You may lose more than your initial investment.

For additional information regarding margin loan rates, see ibkr.com/interest