Top 10 Reasons why we love Portfolio Margin

12/16/2011

It's no surprise that we at The Margin Investor are big proponents of Portfolio Margin. Here is our tongue-in-cheek (but completely true) list of why we think portfolio margin rocks.

1. Leverage for spread traders
Do you trade the spread between two ETF's? Do you trade complex option strategies like calendar spreads, straddles or collars? Want to create a long/short portfolio?
Advanced trading strategies rely on leverage. With Portfolio Margin it's possible to achieve leverage up to 10 to 1.
Portfolio Margin is designed for spread traders. Traditional Reg T? Not so much.

2. Postpone Capital Gains Tax
How about an interest free loan from the government?
Yep, a Portfolio Margin account can be used to postpone capital gains tax on your big stock winners for...well...forever.
Billionaires aren't the only ones who can take advantage of this tax loophole...

3. All you can eat dividends!
There are so many high quality stocks with dividend yields well over 5%. Here's a simple strategy: Create a portfolio of dividend yielding stocks. Leverage this up using portfolio margin, and sit back and collect the dividends. With margin borrowing rates less than 1.5%, a 4 to 1 leveraged portfolio can have a net yield of over 20%.
Concerned about the risk of this type of portfolio? No problem, simply hedge out market fluctuations by shorting the S&P 500 ETF (SPY). What's left over? A pure stream of cashflow.

4. Maintenance Margin = Initial Margin = Easier Trading
Traditional Reg T margin forces you to post higher capital at the time you enter a position (compared to the margin needed for existing positions).
Portfolio margin simplifies this and gives you just one number which defines the margin requirement. Focus on your trading not on your margin.

5. Smart Hedging
Systemic risk is such a huge concern these days. Any moment Europe's financial crises could take down the world economy. It's prudent to be concerned about your portfolio's exposure to this. So I ask you: What are you going to do about it?
Clearly, it's not practical to unwind your portfolio as this would incur huge commissions and could trigger taxable capital gains.

With portfolio margin it's remarkably simple to execute a hedge. Here's how: short an ETF.

With so many ETFs trading these days it's easy to find one that tracks your portfolio and can act as a good short term hedge. When the European crises subsides, simply close the short and you'll be back to your original portfolio. It can't get any simpler than that folks.

The bottom line is that Portfolio Margin gives traders and investors the flexibility you need when you need it.

10 Comments

Kevin G

2/14/2012 03:12:47 am

Your "Top 10 Reasons Why We Love Portfolio Margin" is only 5 Reasons.

Jason Apolee link

2/14/2012 05:12:20 am

Wow, you are right! I had originally entitled this when I envisioned this as the start of a two part series. However, it appears I forgot to mention this at the end of the article. I will publish the other top five in a future blog post.
Thank-you for your readership and good catch!

Matthew M

8/8/2012 04:57:00 am

Thanks Jason for writing this up! Can you please elaborate on #2 - postponing cap gains tax and how it is treated differently than in a strategy-based margin account (assuming the stock is sold in both account before or after 12 months holding period and gains in the account are realized). Thank you!

Jason Apolee link

8/8/2012 05:31:27 am

Sure thing Matt. So, the basic idea is that you hedge out the position in the Portfolio Margin account by selling a call option and buying a put option (with appropriately different option strike prices so that you avoid the IRS constructive sale rule). Since the Portfolio Margin methodology looks at all the positions together, it will see that you are hedged and therefore only a small amount of capital will be required for margin against this position. You can roll this position forward indefinitely thereby avoiding realizing the capital gain.

You said "assuming the stock is sold" - which would mean that you have already realized the capital gain. You need to transfer the stock to a Portfolio Margin account and then enact the hedge.

I wrote a detailed blog article about this strategy. See http://www.themargininvestor.com/2/post/2011/11/prepaid-variable-forward-strategy-takes-heat-from-irs-portfolio-margin-to-the-rescue.html

Matthew M

8/8/2012 07:11:41 am

Thanks for the quick response - yes adding a collar does do the trick in PM accts as long as the stock is not sold. Thx!

Ken

2/26/2014 10:25:28 pm

Hi - question on #3 - I have just changed my IB account from a cash to portfolio margin. I purchased some additional PSEC yesterday, stock yielding 12% - my rationale is that I was borrowing at under 1.5%, with the stock yielding 12% p.a., paying out monthly, I would pocket the difference.

Seems that IB has just debited the USD portion of my account and dividends I have coming in from holding I put up as collateral will be used to reduce the cash balance (and I assume the dividends from the new PSEC purchase will also be used to reduce the cash balance as well).

Can anybody shed more light on this?

Thanks in advance.

4/12/2014 09:28:46 am

yep thats how it works... anything you own on margin is debited first since it is a debt that needs to be paid off.. margin is paid off first, then cash is accrued

Summer

12/2/2014 02:33:07 pm

Hi Jason,

I have a question with #3 of the top 5.

Won't you be paying the dividends of the SPY to the broker since you are short the SPY and therefore negate the "Pure cash flow"? you mentioned about. That is, you get dividends from your dividend portfolio and you pay a similar amount to the broker who let you short the SPY ETF.

Thanks.

Jason Apolee link

12/4/2014 03:46:50 am

Yes, that is partially true. You are short the SPY ETF so you will owe the dividends that the SPY ETF pays out. The trick here is that the dividend yield on SPY is much lower than the dividend yield on the long positions. So, you earn the differential, which can be substantial (albeit, things have changed a lot since when I originally wrote this blog post). At the time I wrote this blog post, the difference was upwards of 4%, inclusive of margin borrowing rates.

Whether this strategy is still a good idea given current market conditions is debatable at this point. Regardless, this strategy is still workable, but the risk profile has likely changed. Basically, the research on this strategy needs to be updated.

As always, thank you for your readership and all the best with your investing!

Wayne Bicknell

3/2/2015 03:36:25 am

Just opened a Portfolio Margin acct at Interactive.... My cash has been deployed over a diversified portfolio (REIT, CEF, CLO, BDC and a few high dividend stocks)... Assuming if I dip into the Portfolio margin at less risk, it really doesn't matter, they look at everything in the account...
Overall portfolio is at 7% distribution...
What about using a portion Portfolio Margin available to increase the holdings in these areas?
Is there an instrument to hedge this?

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Top 10 Reasons why we love Portfolio Margin

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