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I read RPUT ETF prospectus and there is this paragraph:

The number of RUT Puts sold by the Fund varies month to month but is limited by the amount held by the Fund in Treasury bills, the value of which is expected to equal the maximum possible loss from final settlement of the RUT Puts.

I am reading that as any RUT PUT options short-sold in the Fund are already 100% covered by cash/treasuries that also resides in the Fund.

However, in my brokerage account I see that there is additional, explicit 35% margin requirement for my RPUT position:

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  1. Am I misunderstanding RPUT risk profile? As an example - if RUT drops by 50% in a month, then my RPUT position will drop approximately by 50% too? And in the worst case, if RUT drops by 100%, then I simply lose RPUT principal, but I can't lose more, right?
  2. If so, then why there is this explicit margin requirement in my brokerage account?
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Your highlighted paragraph indicates that these are cash secured puts. Therefore, this is not a leveraged ETF (see below). So if the RUT drops 50% in a month, your theoretical loss would be expected to be 50%. However, if such a crash were to occur, the implied volatility of the short puts would dramatically expand put premium. If that premium expansion exceeded the net credit received for the sale of the puts, RPUT's NAV would decrease beyond the RUT's intrinsic loss (see the section titled "Implied Volatility Risk" in the prospectus). This would likely come back into equilibrium as:

  1. Short puts were exercised

  2. The market stabilized and deep ITM puts reverted to parity (no extrinsic value)

  3. Short puts closer to the money headed back toward normal or at least a more reasonable IV (contraction)

The 35% margin amount eludes me. Standard equity margin is 50% with a margin maintenance requirement of 25%. The maintenance requirement for leveraged ETFs is 25% times the amount of leverage (not to exceed 100% of the value of the ETF). So, the maintenance requirement for a 2X leveraged ETF would be 50% and 75% for a 3X ETF. RPUT is non-leveraged so it should be 25%. Brokers have the right to require more margin than Reg T so that may be the case if the 35% number might represent the margin maintenance requirement. If you held options in your account, I'd pose the possibility that portfolio margin might be the reason for a reduced margin requirement but since you didn't list any, that's not likely. So therefore, I'm just guessing at the 35% number.

If you bought this ETF for cash, using no margin then yes, if RUT drops by 100% (an impossible event) then theoretically, you would lose the principal, but not more.

The short answer? You should absolutely contact your broker's trade desk and get definitive answers to your questions about the ETF's risk as well as the margin requirement. Don't trust strangers on the web who have good intentions but may have no clue ;->)

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