Margin allows traders to leverage their capital more effectively by enabling them to control larger positions in the market with a smaller upfront investment. Portfolio margin takes this concept a step further, offering greater flexibility when managing multiple positions under the same account.
Overview
Margin refers to the collateral that traders must maintain in their accounts to cover potential losses on open positions. In traditional options trading, there are typically two types of margin systems: isolated margin and portfolio margin.
With isolated margin, the margin requirements are calculated for each position individually. This system is simple but can be capital-intensive.
Portfolio margin is a dynamic system used to compute the margin requirements for eligible positions by taking into account the entire portfolio instead of calculating the risk for each position separately.
Benefits of Portfolio Margin
Capital Efficiency
Capital efficiency refers to how effectively traders can use their available capital to open and maintain positions. A capital-efficient platform lets traders scale their exposure or diversify their strategy without requiring unnecessary collateral.
Example:
Imagine a trader holds the following positions:
Long BTC Call Option at $112,000 strike price.
Short BTC Put Option at $110,000 strike price.
Under an isolated margin system, the trader might need to allocate $10,000 for each position, totaling $20,000 in margin. However, since these positions offset each other (one benefits if BTC rises, the other if BTC falls), a portfolio margin system may reduce the requirement to just $12,000.
Greater Leverage
By optimizing the use of collateral, portfolio margin allows traders to allocate more capital to larger or additional positions.
Dynamic Risk Management
Portfolio margin systems continuously assess the risk of all open positions. This dynamic approach ensures that margin requirements adjust as market conditions change, giving traders the ability to stay nimble in volatile markets.
Hedging Flexibility
With portfolio margin, traders can easily execute hedging strategies, such as combining options and perpetual contracts (perps), without being penalized by high margin requirements. This flexibility is crucial for managing directional risk across diverse portfolios.
Increased Liquidity
Portfolio margin allows underwriters to allocate their capital more efficiently and as a result, offer more bids and asks across the volatility surface. This greatly increases overall liquidity on Kyan and makes it easier for traders to find makers for their orders.
Enhanced Trading Experience
Managing trades, individual positions, and the overall portfolio becomes far more dynamic, enabling both programmatic and manual traders to respond to market movements with greater speed and precision. This kind of efficiency and functionality has previously only been attributed to CEXs.
Click here to learn more about portfolio margin on Kyan.