My portfolio is composed of all-equity plus 20% out of money protective puts. If the market drops 20%+ (as it is doing now), my portfolio value is constant at 80% of my original investment.

I would like to start buying more stocks on margin as the prices go lower. The positions I'd be assuming though would be fully on margin i.e. my collateral is all equity already and I have zero cash. In addition, all my new positions on margin will be [equity+20% protective puts] as that is my buy and hold pattern and this is not a speculative short term buy to be sold but rather a purchase pulled forward to take advantage of cheaper prices (I expect to cover these positions with salary payments over the next year or two, depending how much the market falls and I'm tempted to buy).

How can I reason about my margin requirements here? I unfortunately cannot find good documentation of this case where:

  1. Collateral is fixed since I will only start rotating in margin past a 20% drop which my portfolio doesn't go below because of its puts.
  2. Equities bought on margin are bought alongside protective 20% out of money puts which means the securities on margin would not suffer more than a 20% drop.

This was a related question: Zero cash buying power, what would margin maintenance be?. But my case adds a few twists that make it harder to reason with the answer in that post.

Thank you so much for helping on this!

1 Answer 1


There are 6 basic synthetic positions relating to combinations of put options, call options and their underlying stock in accordance to the Synthetic Triangle:

  1. Synthetic Long Stock = Long Call + Short Put

  2. Synthetic Short Stock = Short Call + Long Put

  3. Synthetic Long Call = Long Stock + Long Put

  4. Synthetic Short Call = Short Stock + Short Put

  5. Synthetic Short Put = Long Stock + Short Call

  6. Synthetic Long Put = Short Stock + Long Call

These are all variations of S + P - C = 0 which is the core of put/call parity (details not important here). Note that #3 where a call is the same as buying stock plus a protective put.

If your eyes are now glazing over, a simple example will demonstrate this. Assume no dividends and let's pretend that there is no carry cost:

XYZ = 100

Jun 90p = 1

Jun 90c =11

If you compare the P&L of the long call with that of the protective put you'll find that they are is identical. So why put on two positions when you only need to put on one? There is less slippage and fewer commissions (if you are still paying for them). Plus, you will have to pay for margin borrowing as well.

With the market's sharp correction this past week, implied volatility has spiked sharply, making options much more expensive. That adds lot of drag to any new position (like your protective put combo).

If you're going to buy calls, another consideration might be the Stock Replacement Strategy. This consists of buying a high delta call LEAP as a surrogate for owning the underlying. This makes sense if implied volatility is reasonable (this week it's not). Because the call is deep ITM, you'll pay a modest amount of time premium and you'll have little time decay (theta) in the early months, and an even lower theta if it's a two year LEAP.

My approach in recent years has been to collar positions. I'm not suggesting that it's better than yours. It's just that I'm more comfortable playing in the middle. For example, I bought and collared DOW a few weeks ago at $44+ and as of yesterday, it's 31+. As it dropped, I rolled the long puts down and mildly pyramided them (bought two more puts than I sold). At 13 points lower, I'm down at most 4 points and while not a winning idea, I've lowered my cost basis to $35, allowing me to hold on. If it heads lower, I'll continue the process and because of those extra puts, the position will make money.

What does this have to do with you? If you prefer to buy stocks on margin and collect dividends, then OK, buy put protected stock instead of calls. And as your stocks drop and your protective puts become more valuable, you too can roll the puts down, lowering your cost basis and raising cash.

I haven't addressed your question about margin because I think that this information could possibly alter your approach. If not, I'll try to help with the margin aspect.

  • 1
    Thanks so much Bob! I have sadly some constraints 1. Money is not my thing. I don't have the expertise to set up sophisticated positions. Buy and hold works for me in that way. Puts are there for protection. 2. I'm resident of Switzerland where capital gains tax is zero for retail traders and you lose that qualification if you trade derivatives for any purpose other than hedging your wealth. So I'd have to factor 40% marginal tax rate vs. 0% for my gains if I switch my method. So I might end up losing money by either doing something stupid or by sending my gains to the tax office! Mar 10, 2020 at 14:11
  • And great point on liquidating the options for cash. That's exactly my plan if the market really crashes. 20% puts are already close to the money. a 50% crash would generate 30% fresh cash I can work with if I am willing to increase my exposure which I am for a significant enough crash. Mar 10, 2020 at 14:19
  • OK, so much for that idea :-). For your put protected stock idea, buy longer dated puts so that you can minimize time/theta decay. What is your the margin requirement as well as the minimum margin maintenance requirement? Provide that and I'll see if I can answer some of your original question. Give some consideration to rolling your appreciated long puts down. Yes it adds additional risk but it also locks in gains while lowering cost basis. If you do nothing and time passes and/or the stock rallies to purchase price, the puts just decay and you have nothing to show for your efforts. Mar 10, 2020 at 14:32
  • Google and read about "Special Memorandum Account (SMA)". SMA is the amount of buying power in your account. It depicts your margin situation. Mar 10, 2020 at 14:46
  • 1
    Thank you so much Bob. I've reached out to IB. Indeed looking at their documentation, seems Portfolio Margin would suit me best in this case. This information has been invaluable, thanks for being so kind! Mar 11, 2020 at 10:35

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