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What Is Portfolio Margining?

About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

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27 Responses to “What Is Portfolio Margining?”

  1. Keivan January 3, 2015 8:10 am #

    Dear Mr. Alan,

    Do you use a margin account for trading covered call or naked put? (I mean 2x leverage) or only the IRA with no leverage at all?

    Does you ordinary assumption for monthly profit of 2 to 4% is based on and IRA account or a margin account?

    How much percentage of you buying power should be used for reaching our monthly target? (in a IRA account and in a Margin account).

    Awaiting for you kind reply as before,
    Regards,
    Keivan

    • Alan Ellman January 3, 2015 8:16 am #

      Hi Keivan,

      Our international members are greatly appreciated.

      My opinion (just one man’s opinion) is that MOST retail investors should be trading in cash accounts, sheltered whenever possible for option-selling.

      My goal for an initial return of 2-4%/month is based on cash accounts and I invest 96 – 98% of the cash dedicated to option -selling each month, the remainder I leave available for exit strategy execution.

      Alan

  2. Leo January 4, 2015 12:03 pm #

    Hi Alan,

    I just want to clarify using the current BCI newsletter list of stocks for cash secured puts. In your new book you say this same list can be used. I like selling puts on stock in recovery and heading up to avoid assignment. All else being equal would you say choose those from the BCI list and avoid those showing sign of turning down both stochastics and chart?

    Thanks
    Leo

    • Alan Ellman January 4, 2015 6:47 pm #

      Leo,

      Absolutely, the list is precisely the same. As I describe in my new book, selling cash-secured puts can be used for income generation only, to purchase a stock at a discount or as part of a multi-tiered strategy which includes covered call writing. You are using it for income generation only. You can use all eligible stocks in the white cells. Those with mixed technical as opposed to all bullish (bold stocks) would lead us to favor deeper out-of-the-money strikes that still meet our 1-month goal for initial returns (mine is 2-4%). I factor in overall market conditions as well as an important consideration. For example, I may use a near-the-money strike or even an in-the-money strike in strong bull markets to generate higher returns and still have a minimal chance for assignment.

      Finally, you can always use one of our exit strategies to avoid assignment if the strike is ITM near expiration.

      Alan

  3. Larry January 4, 2015 12:07 pm #

    Just got your new book selling cash secured puts, great read.
    One question regarding selling options using ETF’s. Do you need to use an accounting method called “mark to market” to report to the IRS? our thoughts.

    Larry

    • Alan Ellman January 5, 2015 11:16 am #

      Larry,

      All tax-related questions should be confirmed by your tax advisor.

      My understanding is that “mark to market” applies to stock brokers and not retail investors like us. I believe that it is also used in the currency-trading industry.

      Alan

  4. Barry B January 4, 2015 5:16 pm #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor premium member site and is available for download in the “Reports” section. Look for the report dated 01/02/15.

    For your convenience, here is the link to login to the premium site:

    https://www.thebluecollarinvestor.com/member/login.php

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan”segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    http://www.youtube.com/user/BlueCollarInvestor

    Best,

    Barry and The Blue Collar Investor Team

  5. Fernando January 5, 2015 4:23 am #

    Hi Alan:

    Complete newbie here. I’m using ETrade and their option chain has weekly columns, e.g. Jan 30, Feb. 6, etc. The dates all fall on Fridays all month long each and every month. I read that the universal option expiration date is the third Friday of the month, which in January would be Friday, Jan, 16, 2015. When I look up the Jan. 30 strike prices, it says “26 days to trade”.

    I’m confused – it says 26 days to trade but there’s only 16 days between now and Jan, 16, but more than 30 days between today and Feb. 20.
    So if I select a call option under the column “Jan. 30” or “Feb. 6”, what are the respective option expiration dates? I understand these options are weekly but that’s all the ETade option chain shows. I really want to trade month long options so how do I reckon it if the columns are stated in weekly increments?

    Confused,

    Fernando

    • Alan Ellman January 5, 2015 4:36 am #

      Fernando,

      With the growing popularity of options and the increasing number of option expirations available this can be confusing.

      Here are the general guidelines you need to know:

      1- All monthlys expire on the 3rd Friday of the month at 4 PM ET. Those (like me) who focus on monthlys use these in their option-selling portfolios.

      2- Many (but far from all) stocks and ETFs also have weekly options associated with them. Most are part of the “expanded weekly program” where weeklys are availavle 4 weeks in advance and expire every week. When a monthly coincides with a weekly, only the monthly is available.

      3- In the specific example you inquired about, the January 30th weekly option expires 26 days from the January 4th date when you looked it up.

      4- When looking at an options chain, carefully check the expiration date. If it does not fall on the 3rd Friday (many brokerages use the 3rd Saturday date…same option) of the month, it is a weekly option.

      Please take your time becoming familiar with everything associated with options before trading your hard-earned money. It won’t take that long to master this strategy.

      Alan

  6. Anton January 5, 2015 8:14 am #

    Alan,

    I skimmed through the sample Weekly Stock Screen and Watch List and noted that the Running List includes all Eligible Candidates (50 in all) PLUS another three: APH, WNC and JLL.

    I am not sure if I should expect to find only the eligible candidates in the running list. If yes, can you please explain the presence of APH, WNC and JLL.

    Thanks,

    Anton

    • Alan Ellman January 5, 2015 11:18 am #

      Anton,

      What is the date of the sample report you are referencing?

      If the 3 stocks you are inquiring about are on the top of the running list in yellow or gold rows, those are companies reporting earnings in the current contract month and not eligible until after the report passes.

      ALL stocks in the “white cells” of the running list are eligible candidates.

      Alan

      • Anton January 5, 2015 11:31 am #

        Alan

        I am referencing the Sample Premium Stock Report available in the Free Resources. It is dated 06/13/2014. These three stocks are not highlighted in yellow but included with the rest of the eligible candidates in the “white cells”.

        I am trying to familiarize myself with the report while I wait to receive the Encyclopedia. I have to kill the waiting time somehow!

        Anton

        • Alan Ellman January 6, 2015 8:06 am #

          Anton,

          In most cases, there will always be a few more stocks on the Running List than on the “Weekly Stock Screen” (section one of the report). In these cases, the stocks either didn’t appear on the IBD 50 for the current week or were not part of our “Other” pool of stocks. Once a stock makes it to the Running List, it remains there. We re-screen every stock on the Running List every week. If a stock on the Running List fails the weekly screening process,we place it in the “Passed Previous Weeks And Failed Current Week” section to be re-screened in the next week. If a stock fails the process for three weeks in a row, it is removed from the Running List.

          So…in most weeks there will always be a few more stocks in the Running List than in the Weekly Stock Screen.

          Alan

  7. Barry B January 5, 2015 12:56 pm #

    Premium Subscribers,

    The Weekly Report has been revised and uploaded to the Premium Member site. Look for the report “Weekly Stock Screen And Watch List 01/02/15-REVA.

    We just received the updated StockScouter list and the weekly report has been updated to include the data that we received about an hour ago.

    Best,

    Barry and The BCI Team

  8. Joseph January 7, 2015 11:41 am #

    Alan,

    I watched the beginners series and am about ready to start my membership.

    I was wondering, after I sell a covered call is there a method to get advice on to respond to the fluctuations in the market?

    Joseph

    • Alan Ellman January 7, 2015 11:47 am #

      Hi Joseph,

      The educational material we provide covers position management in extreme bull and bear conditions. Chances are that once you learn that material you will not need anyone, including me, to give you guidance.

      That said, feel free to share your trades on the Blue Collar blog and open them up for discussion. My team and I cannot give specific financial advice but can get you in the right direction with general comments. Other members may also comment and we encourage and appreciate all the feedback.

      We also have a phone-coaching program, done via Skype if you need more personalized attention in the early-going.

      Welcome to the BCI community.

      Alan

  9. Alan Ellman January 7, 2015 6:13 pm #

    Premium Members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site and is available in the “ETF Reports” section. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.
    Look for the report dated 1-7-15

    Members planning to attend my Phoenix area seminars on Friday/Saturday, please introduce yourself to me:

    Phoenix, Arizona area:

    1- Phoenix Point Options Group
    January 9, 2015: Tempe, AZ: 7:00 – 9:00 PM
    Link is above…scroll down.

    2- American Association of Individual Investors- Phoenix Chapter

    January 10, 2015: Scottsdale, AZ: 9 AM – 12PM and 1:15 PM to 2:30 PM

    (Click on links above in the body of the article)

    Alan

  10. Dan January 8, 2015 10:41 am #

    Hi Alan,

    I bought your book (the kindle version) today and I’m starting to read through it.

    One question:

    Say IBM is at $100, and I sell a $95 dollar PUT. One day during the month, the price drops for 10 minutes to $94.50, then rebounds a few minutes later to $96. Would the PUT likely be exercised in those 10 minutes? Or is the PUT owner more likely to wait until near the expiration (or on) date?

    P.S. I’m very familiar with options and the Covered call strategy.

    Thanks,

    Dan

    • Alan Ellman January 8, 2015 10:49 am #

      Dan,

      Early exercise is highly unlikely. An option premium consists of time value + intrinsic value. In the scenario you describe, the IV is $0.50 which would be realized upon exercise (minus commissions). However, the time value component of the premium would be lost. The holder would be better off taking no action or selling the option depending on her goal.

      Most in-the-money strikes are exercised the day after expiration Friday so we have until 4 PM ET to avoid exercise if that is in our best interest.

      Alan

  11. Alan Ellman January 8, 2015 10:45 am #

    Members:

    I received an email from the AAII Phoenix Chapter regarding my Saturday morning presentation. Evidently, registration was sold out a few days ago so those planning to register at the door may not get a seat depending on if others do not show up. Although I’d love to meet our members I wanted to give you a heads-up in case you didn’t pre-register. Right now on site registration will be limited to the first 15, so arrive early if that’s how you plan to attend.

    There are spots available for the Friday evening and Saturday afternoon sessions.

    Alan

  12. Rod January 8, 2015 12:38 pm #

    Hello Alan,

    Congratulations on the launch of your new book. (I have recently bought a copy, yet to arrive in the UK) and very much looking forward to reading it. Indeed it might answer my problem as referred to below?

    I sent an email asking for advice before Christmas but you advised that the screen shot was illegible so I have recorded the action in text format belowl. I have tried to identify a strategy from your encyclopedia but this situation does not appear to quite fit any of the listed scenarios.

    Briefly, I bought SWI stock from your weekly report, it gapped up almost immediately, undulated a little but generally continued to rise. The technicals became neutral and I did not want to risk holding it any longer. I therefore sold (at a profit) but regretted that the price of buying back the option significantly reduced the profit, but what else could I have done?

    11/6/14: Buy 100 x SWI @ $48.37
    11/6/14: STO 1 Dec. $50 call @ $0.95
    12/10/14: BTC 1 x Dec. $50 call @ $2.30
    12/10/14: Sell 100 x SWI @ $51.39

    I look forward to hearing from you but meanwhile may I take this opportunity to wish you, your colleagues at BCI and your family all the very best for 2015.

    Kind regards,
    Rod.

    • Alan Ellman January 8, 2015 12:53 pm #

      Hi Rod,

      My new year’s wish for you is that all your trades turn out like this one. Let’s break down the math:

      Your max profit going in is option premium + share appreciation to the strike:

      $95 + $163 = $258 = 5.3% ($258/$4837)

      When you closed you had an option debit of $230 but your shares were now worth $51.39, not the option obligation of $50. So the real cost to close (minus commission) is:

      $230 – $139 = $91

      Our 1-month return is then $258 – $91/$4837 = 3.5%

      No Kleenex needed here.

      Generally speaking, when a stock price rises, we close as the time value of the premium approaches zero. In this case, we gave up 1.8% of the 5.3% max possibility. Our system is designed to give our members flexibility. That’s why I reference our criteria as guidelines (except the earnings report RULE).

      So, taking a 3.5%, 1-month profit earns you BCI Investor of the Month! SMILE!

      Keep up the great work.

      Alan

  13. Fernando January 8, 2015 2:26 pm #

    Hi Alan:

    Thanks for clarifying the weekly option scheduling issue.

    I just finished reading your book “Exit Strategies for Covered Call Writing” and I had a similar question about monthly call writing. You talk about a 1 month option contract lasting 4 weeks or 20 trading days. It is unclear to me when the contract period begins and when it ends. My common sense impression is that the contract period’s end is co-terminous with the expiration date of the option, i.e., they expire at the same time. Thus, for the Jan. 16 expiration Friday date, I would have counted backwards 20 trading days, telling me that the contract period corresponding to the Jan. 16 expiration date actually started on Dec. 22, 2014, exactly 20 trading days earlier.

    Applying the same logic to the next month February 20 Friday expiration date, counting 20 trading days backward would have taken me back to January 26 as the start of the contract period for the Feb. 20 date. Does this mean then that if I want to stick to a consistent 1-month trading pattern, and given that today is Jan. 8, my 1 month target date is Feb. 20 calls? It can’t be Jan. 16 because Jan. 16 is only 7 trading days from today, and should it be Feb. 20 which is still a good 33 trading days into the future?

    I guess the key question is: If I want to sell a covered call today, January 8, 2015, and I want to be a monthly trader, should I look at the Jan. 16 strike prices (less than 20 days) or at the Feb. 20 strike prices (more than 20 days). In effect, what is your definition of a trading month in terms of when the reckoning begins and when it ends?

    Sorry for taking you time, but this is key to my intention to follow your trading strategy for a long time to come.

    Sincerely,

    Fernando

    • Alan Ellman January 8, 2015 2:31 pm #

      Fernando,

      Most options expire on the 3rd Friday of the month so positions for monthlys can be entered on or around that date (a few days before or after is good too). Keep in mid that some contracts are for 4-weeks (about 8 per year) and some for 5 weeks (4 per year) so we have a bit more flexibility with the 5-week contracts. Always watch the dates on the options you select because many stocks have weekly options (that’s a whole other discussion).

      Some of our exit strategies will dictate selling options mid-contract but I like to enter initial monthly trades on or near expiration Friday.

      Alan

  14. Pete January 8, 2015 5:49 pm #

    Alan

    Thanks for AMBA, made $1100 in two days, sold out of the money puts then closed it out.

    Pete

    • Alan Ellman January 8, 2015 5:52 pm #

      Pete,

      You made my day.

      Keep up the good work,
      Alan

      • Pete January 8, 2015 6:11 pm #

        Paid for my subscription in an hour or so!!!!!!!!!! Have a handful of others from your list that Im stalking. Many thanks.

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