Portfolio Margin

Portfolio margin is a way of calculating how much money a brokerage requires you to keep in your account, based on the overall risk of everything you hold, rather than adding up requirements for each position separately.

The more common system most traders start with is called "Reg T" or standard margin. Under standard margin, each position is looked at more or less on its own, and rules of thumb (like requiring a fixed percentage of a stock's value, or a fixed amount per option contract) set the requirement. This tends to be simple but blunt: it doesn't give much credit for the fact that some positions offset each other's risk. For example, if you own a stock and also own a put option that would gain value if that stock fell, standard margin may not fully recognize that the put is protecting you.

Portfolio margin instead uses computer models that simulate how your entire account would perform if the market moved up or down by various amounts, often stress-testing something like an 8% to 15% swing (a hypothetical range used in one common model, not a fixed rule). The margin requirement is based on the worst realistic loss the model finds across that range, applied to your whole basket of related positions at once. Because hedges and offsetting positions are accounted for, someone with a well-balanced portfolio can often be required to hold less margin than under standard rules — but someone with a large, one-directional, undiversified position can end up with a higher requirement, since portfolio margin is unforgiving of concentrated risk.

The nuance that trips people up: portfolio margin isn't automatically "better" or looser. It rewards genuine hedging and diversification, and penalizes big uncorrelated bets. It's also generally only available to accounts that meet a minimum equity threshold and have brokerage approval, since the leverage it can grant cuts both ways — smaller required margin means positions can be sized larger, which magnifies both gains and losses.