Understanding Portfolio Margin on OPNX: A Comprehensive Guide

 

Portfolio margin is an advanced trading feature that allows traders to increase their buying power by leveraging their entire portfolio. 

 

OPNX offers this powerful feature to its users. 

In this article, we will explore the unique features of cross-collateralization on OPNX and how it can benefit traders: 

• Increased trading flexibility 
• Diversified portfolio risk

   

The guide: a comparative approach

In order to understand portfolio margin and how OPNX utilizes cross-collateralization, a comparative approach will be taken within this article.  Firstly, the fundamentals, history, and formula of a typical portfolio margin will be discussed, which will then lead to OPNX’s approach and the benefits that derive from this.

 

What is portfolio margin?

Portfolio margin is a fundamental aspect of any exchange or clearing house. It is the framework that enables traders to utilize their entire portfolio to calculate margin requirements. In essence, the risks associated with holding positions in a margin account/ with borrowed capital (leverage) are offset by adopting a holistic approach, considering all positions.

An example of this offsetting process is demonstrated by comparing portfolio margin functionality with the traditional margin system. Imagine an investor has 2 positions in their entire portfolio, one is doing well, and the other is taking a downturn. Under traditional, reductionist margin approaches,  the investor will have a fear of a margin call on the position that is heading to the downside. This underlines why the traditional system is more capital intensive, as the investor may be required to post more collateral at a sooner date. On the other hand, a portfolio margin would permit the position that is in the green to counter the position that is in the red. Therefore, the risk of having to post more capital to maintain the overall portfolio has been offset by the more successful trade.

 

History of portfolio margin

The use of portfolio margin dates back to the late 1970s when the New York Stock Exchange (NYSE) first introduced it. The concept of portfolio margin was initially adopted by individual investors and institutional traders who needed to manage large positions in multiple stocks with minimal capital outlay.

In 1984, the NYSE officially authorized member firms to offer portfolio margin accounts. These accounts allowed traders to use a single margin deposit for multiple positions, rather than having multiple separate deposits for each stock. This lowered the cost of trading and enabled investors to manage larger positions with smaller amounts of capital. This was seen as a solution to two key frictions that were present in the market, namely margin requirements being too high and investment risk not being truly reflected in the traditional margin system.

In 2007, the Financial Industry Regulatory Authority (FINRA) approved portfolio margin on all US exchanges. This allowed traders to use portfolio margining across multiple stocks, options, and futures products in one account.

 

What is portfolio margin in crypto?

In crypto, portfolio margin is the percentage of your crypto portfolio that you are able to borrow from a crypto exchange in order to trade. In other words, you are using your existing holdings as collateral for additional trades. It is an important tool for advanced traders, as it allows them to leverage their position to make larger trades with less capital. 

 

What is the standard formula for portfolio margin in crypto?

 

 

Let's work through an example; please bare in mind that most exchanges will vary depending on the leverage (L)  they enable you to use and the correlations (ρ) they set/ calculate.

Position 1: The investor is Long BTC market at the current mark price of $28,000 and they are maxed out on leverage at 100x.

Position 2:  The investor is also Short BTC with a current mark price: $26,000 and again, they are maxed out at 100x leverage.

In this example, L = 100 and ρ = 0.70

Portfolio Margin (IM) =0.012 X 26,0002+0.012 X 28,0002-2 X 26,000  X 28,000 X 0.01 X 0.01 X 0.7  

 

OPNX key terms to note

Before we dive into the functionality of the portfolio margin/ cross-collateralization on OPNX, you should note these terms:

Collateral Balance ($USDT) = sum(Balances * Effective LTV)

Initial Margin ($USDT) = Minimum amount of collateral required to support open positions and working orders

Maintenance Margin ($USDT) = Initial Margin / 2 ]

Maintenance Margin ($USDT) = Minimum amount of collateral required to avoid liquidation

Margin Ratio (%) = 100 * Maintenance Margin / Collateral Balance

 

The basics of portfolio margin on OPNX

On OPNX, traders can use cross-collateralization, meaning their portfolio will act as collateral to trade futures contracts with leverage. Please note when opening up an OPNX account, you have the ability to maintain parent and sub-accounts. These are all independent of one another and thus, positions in one sub-account will not counteract/ offset any risk associated with other sub-accounts.

To start trading with portfolio margin, traders need to deposit collateral, which can be in the form of cryptocurrencies, stablecoins, and claims. Once this deposit has been approved, you can begin opening up positions. Such positions will act as collateral (portfolio margin), meaning it is used as security against potential losses from other trades. This is what enables you access to leverage and will affect the way in which you could be liquidated.

The cross-collateralization calculation works by considering all the open orders (including limit orders) across all underlying markets, and then calculating the trader’s total margin requirement. This includes both initial and maintenance margins, as well as the leverage used on each order.

 

OPNX example

Considering a portfolio with only two positions:

 

The correlation between these two markets is set to 0.  The portfolio margin is calculated by the following, derived from the general formula described in the documentation above:

PortfolioMargin(IM) = 0.002527,5002+0.002520,0002+227,50020,0000

PortfolioMargin(IM) = 1700.184

Maintenance Margin (MM) = 850.092

The margin requirement for a trader's portfolio is calculated based on the total risk of the positions in the portfolio. This means that the margin requirement for a portfolio of long and short positions is lower than the margin requirement for the same positions in an isolated margin system.

Finally, OPNX offers a liquidation engine that automatically liquidates positions to prevent losses from exceeding the margin requirement, which helps to minimize the risk of losses.

 

Liquidations 

The portfolio margin calculator will provide warnings when a trader goes over their margin limit. This allows traders to quickly adjust their position size before any liquidations occur due to an insufficient balance. 

At OPNX we give you a well-informed liquidation price taking in the data from your current trades to present you with an estimate. This enables you to adopt a holistic approach when it comes to evaluating your portfolio and how positions are affecting one another. 

 

Liquidation formula and key terms

Formula:

Estimated Liquidated Price = Mark Price - Collateral Balance - Maintenance MarginPosition

Mark Price is the current mark price

Collateral Balance is the haircutted collateral value

Maintenance Margin is the current maintenance margin

Position is the contract position. negative for short positions

 

What are the benefits of portfolio margin on OPNX?

Cross-Collaterlization offers several advantages, including:

Increased trading flexibility

On OPNX, traders can use their entire portfolio in each sub-account as collateral for their trades. The cross-collateralization feature ensures increased trading flexibility, enabling traders to make larger trades without having to commit as much capital upfront.  By increasing your leverage, you can also make more trades at once, and therefore potentially increase your profits over time.  This can increase the potential returns on your investment by allowing you to profit from both market appreciation and leverage gains. 

Diversify portfolio risk

Portfolio margin also enables traders to reduce their exposure to the markets by allowing them to spread out their risk across many different coins or tokens. By taking multiple smaller positions on different cryptocurrencies, it reduces the amount of capital that is at risk from any single position. 

While not every coin will rise in value at the same rate as other coins, if one coin has gone down in value but another has gone up instead, then portfolio margin allows investors to take advantage of that disparity by selling out their losses while buying into gains elsewhere.

Portfolio margin also helps traders manage their risk better by allowing them to adjust their positions quickly in response to changing market conditions. By taking smaller positions on multiple coins, traders can adjust the size of their position or even close out some positions if they feel the need to do so. This helps them manage their risk more effectively, while still having the opportunity to take advantage of profitable trading opportunities.

 

What are the risks of portfolio margin?

While portfolio margin may offer advantages in terms of capital efficiency, it also introduces certain risks. Here are three potential risks of using portfolio margin in crypto trading:

 

Increased Leverage

Portfolio margin can provide traders with significantly more leverage than they would have with a traditional margin account. This increased leverage can amplify both profits and losses, especially during volatile market movements, potentially leading to greater losses than anticipated. When trading on leverage, a small move in price could result in a large loss if the position is on the wrong side of that movement. 

Higher Margin Calls

Because multi-collateral takes into account the entire portfolio's value, any significant decline in one asset's value can result in a margin call on the entire portfolio. If the trader is unable to meet the margin call, the exchange may liquidate assets to cover the shortfall, potentially leading to further losses.

Correlations in the market

This is a double-edged sword that can either cause strong profits or intense losses. For example, if you had a long only portfolio and the market was moving up, of course you would find yourself with greater PnL, especially if you are trading with leverage. However, if the market suddenly moves down, you are exposed to your position values declining, meaning less collateral for other positions, and thus face an increased risk of being liquidated.  

Overall, the OPNX portfolio margin calculator is designed to help traders manage their risk and better understand their positions. It will provide a comprehensive overview of the trader’s position, enabling them to adjust accordingly. This is especially useful for traders who are trading complex strategies across multiple markets. For these traders, the portfolio margin calculator can be an invaluable tool for managing risk and understanding performance.

 

Summary

• Portfolio margin is an important tool for advanced traders looking to increase their exposure in the cryptocurrency markets.
• By leveraging their existing holdings, investors can make larger trades with less capital and potentially reap greater rewards.
• Portfolio margin trading also carries greater risk due to the leveraged nature of the strategy and should only be used by experienced traders familiar with extreme volatility.