## Regular margin recap

First let’s have a quick recap of how a regular margin account works. On a regular margin account, each position has its margin requirements calculated separately. If you have multiple positions, these are simply added together to give you the total margin requirements for the account.

**Note:** *A regular margin account is the default on Deribit. If you haven’t specifically requested portfolio margin you will have a regular margin account.*

Initial margin (IM) is how much margin is required to open a position. Once you have no more spare initial margin (your IM bar is at 100%+), you will no longer be able to open a new position until the initial margin usage has decreased below 100%.

Maintenance margin (MM) is how much margin is required to keep the position open. This will always be a lower amount than initial margin. Once there is not enough margin left in your account to satisfy the maintenance margin requirements, your positions will begin to be liquidated. More on this in the liquidation lesson.

With regular margin accounts both IM and MM are calculated using fixed formulas, depending on the product.

Note: IM and MM are not added together. If IM is 13 BTC and MM is 10 BTC, you would need 13 BTC to open the position, not 23.

## Portfolio margin

Portfolio margin offers a completely different way of calculating margin requirements. Instead of calculating the margin for each of the positions in an account separately, the portfolio margin system looks at how the entire portfolio of positions would perform together with changing market conditions.

The performance of the whole account is tested against changes in several parameters. Whichever of these scenarios would inflict the largest loss to your portfolio, this loss amount is then used to calculate your margin requirements.

Let’s look at each of the parameters that go into the portfolio margin calculation as well as where you can find them on the Deribit website.

## The portfolio margin pop up

When you have portfolio margin enabled on your account you will have access to the portfolio margin pop up. This can be found in the portfolio margin tab in the account/settings page. This pop up displays both the current value for each of the parameters used in the calculation, and all your current positions with the corresponding margin calculations.

**A, B, C** – The parameters used in the margin calculations

**D, E** – The contingency totals based on your positions

**F** – The total calculated maintenance margin requirements, including the contingencies

**G** – The totals as calculated in H and I, grouped together

**H** – Each futures position with the corresponding calculation

**I** – Each option position with the corresponding calculation

Now let’s go into more detail about each of the parameters used in the calculations.

## Underlying price movement

As you might expect the most notable parameter is a change in the underlying price. In the PM pop up you can see the current value (10%) at point B. You can also see it being applied in the calculations below at G, H and I, with a 10% decrease in price to the left and a 10% increase in price to the right.

What this means is that the system will look at how your positions as a whole would perform with a 10% increase in the underlying price of BTC, and the same for a 10% decrease. Whichever would result in the largest loss for your account, this amount is then used as your required maintenance margin.

**Note:** *With portfolio margin the initial margin is simply your maintenance margin plus 30%. So IM = MM x 1.3. *

## Implied volatility

Although price movement is often the most significant factor it is not the only change the portfolio is tested against. For options, another significant parameter that needs to be accounted for is the implied volatility (IV). After all if current IV is relatively low and the price moves down 10% in a day, IV is likely to increase dramatically. This will greatly increase the mark prices of options and therefore the maintenance margin requirements.

You can see the current range for both an increase and decrease in IV at point B. These values have automatically been taken into account in the options table at point I, with whichever one would cause the greatest loss being used.

## Contingencies

Contingency amounts are added to the calculations for futures positions, and option positions that are net short on a particular strike. You can see the contingency rates at point C, and the actual amounts for the current portfolio at points D and E.

These contingencies ensure there is a floor to how much margin positions will require, even when they offset each other, avoiding the possibility of a position requiring zero margin.

## Skew & Kurtosis

Skew is a degree of distortion from a symmetrical distribution curve.

Kurtosis is a measure of how steep the volatility curve is. You can see the current value being used in the calculations at point A.

As you can see the portfolio margin calculation is quite a lot more complicated than the relatively simple formulas used for regular margin accounts. While it can lower requirements for some, this complexity means portfolio margin certainly isn’t for everyone.

## When is portfolio margin useful?

Portfolio margin has clear advantages for positions that offset each other, as the maintenance margin requirements can be considerably lower. For example option spreads, opposing futures positions or a combination of futures and option positions.

If you wanted to sell a call spread, for instance selling BTC-27DEC19-10000-C and buying BTC-27DEC19-12000-C, your margin requirements will be significantly lower in a portfolio margin account because the potential losses from selling the 10000 call are largely offset by the purchase of the 12000 call. In a regular margin account, while the profit/loss would still be offset, **the margin required would not be offset**.

## When is portfolio margin not useful?

It’s not always the case that portfolio margin lowers the margin requirements. For example directional futures positions that are not large enough to require over 10% maintenance margin in a regular account (due to the linear increase in margin requirements), will actually have lower requirements with a regular margin account.

If you are strictly going to be longing options, you may also choose to do this on a regular margin account instead of a portfolio margin account. In a regular margin account when you buy an option you pay the whole premium up front, so there is no chance of getting liquidated. This is one of the biggest benefits to buying options.

If you buy options in a portfolio margin account, the system may not need you to tie up the whole premium. This has the effect of building in some extra leverage to your position, and with leverage comes the possibility of liquidation.

## Account requirements

To qualify for portfolio margin you must maintain an account equity of at least 0.5 BTC and/or 15 ETH. You must also confirm that you have an understanding of how portfolio margin works, as well as already have experience trading options. If you do not have this experience portfolio margin is not appropriate. However, it is possible to have it added to a testnet account first if you wish to try it out.

To apply for portfolio margin, send an email to support@deribit.com.

## Order limits

Unlike with a regular margin account, where each open order takes up initial margin, the open orders in a portfolio margin account do not take up initial margin. For this reason there are separate limits placed on the maximum number of open orders you may leave in the orderbooks. You can see these limits in the portfolio margin tab as shown here:

These limits will be related to the size of your account. They are necessary because no initial margin is tied up for open orders in a portfolio margin account, so they limit the possibility that a trader will leave more orders than their account could possibly cope with should they be filled. Without these limits, the ability for a large price move to cause all of a traders orders to fill and cause an instant liquidation would be too great.

## Liquidation

The liquidation process also works differently for portfolio margin accounts. The liquidation engine will aim to reduce the risk of your overall portfolio by first trading futures. This could result in opening new futures positions you did not already have open. The goal of this is not to reduce your position size, but reduce the risk of your portfolio, which in turn should bring your margin requirements back below your equity.

Options may also be traded during the liquidation process, however these will only reduce your positions.

Whenever maintenance margin is higher than 100%, it is to the discretion of Deribit risk management how to handle your position in an attempt to reduce the risk of bankruptcy.

## Summary

To summarise, portfolio margin is a powerful tool that an experienced trader can use to reduce margin requirements on hedged positions. However, you should only enable portfolio margin if it will benefit your positions **and** you are very comfortable with using margin and leverage already.

The two most obvious examples of where portfolio margin is undoubtedly beneficial are:

- Option spreads/portfolios
- Futures positions that are so large that they require more than 10% maintenance margin due to the linear increase in MM calculations for regular margin accounts

While it is more complex, if portfolio margin is suitable for you, then it can greatly reduce your margin requirements.

**AUTHOR(S)**