Margin Requirement for Securities
Author: DartboardTrader
Creation Date: 4/5/2014 2:54 PM
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DartboardTrader

#1
Is there a fundamental series for the margin requirement on a security?
This value changes depending on market conditions and volatility of the underlying security. This value is important for determining margin risk of a strategy and portfolio. For a portfolio management algorithm, this may also be an important factor.

For instance, strategies wielding 3x ETFs in a 1:1 cash account effectively use a 3:1 leverage. This should be quantified in the performance and risk statistics of the strategy.

The same applies to strategies on the WealthSignals website. A strategy using 3x ETFs in a 2:1 margin account effectively uses 6:1 leverage. Subscriber beware.
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Cone

#2
Although they're called "leveraged ETFs", holding them does not translate to account leverage. When you buy an ETF, leveraged or not, you can lose only the value of what you've purchased and no more. How is it any different than holding stocks that can rise or fall 25% or more overnight?
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DartboardTrader

#3
True, a volatile bucket of stocks may be considered a comparable risk, as well as using weapons of portfolio destruction such as entering Futures without an exit strategy or a stop loss set at zero account value. That said..

My interest is more in the initial and maintenance margin requirements. Most brokers are willing to give customers 2:1 leverage (some offer 4:1), but there is a big difference between having a portfolio full of stocks with 15-20% margin requirements and a portfolio full of stocks with 40-50% margin requirements. This may help identify and limit strategies trading penny stocks or "risky" stocks on margin (which some brokers do not allow.) Knowing and respecting the initial margin requirement (sometimes at least 70% the stock's value) is also important to prevent a backtest from entering positions the broker would not have allowed.

Also, as maintenance margin requirements increase during bear markets or single-security selloffs, margin calls will occur. Being able to model margin calls is important for evaluating strategies attempting to use an account's maximum margin leverage.