The Geometry of Leverage Space Portfolios 341
Upside Limit on Active Equity and the Margin Constraint
AND THE MARGIN CONSTRAINT
Even if you are trading only one market system, margin considerations can
often be a problem. Consider that the optimalfin dollars is very often less
than the initial margin requirement for a given market. Now, depending on
what fraction offyou are using at the moment, whether you are using a
static or dynamic fractionalfstrategy, you will encounter a margin call if
the fraction is too high.
When you trade a portfolio of market systems, the problem of a margin
call becomes even more likely.
What is needed is a way to reconcile how to create an optimal portfolio
within the bounds of the margin requirements on the components in the
portfolio. This can very easily be found. The way to accomplish this is to
find what fraction offyou can use as an upper limit. This upper limit,L,is
given by Equation (10.08):
L=
n
MAX
i= 1(fi$)
∑n
k= 1(( n
MAX
i= 1
(fi$)/fk$)
∗margink) (10.08)
where: L=The upside fraction off. At this particular fraction off,
you are trading the optimal portfolio as aggressively
as possible without incurring an initial margin call.
fk$=The optimalfin dollars for thekth market system.
margink$=The initial margin requirement of thekth market system.
n=The total number of market systems in the portfolio.Equation (10.08) is really much simpler than it appears. For starters,
in both the numerator and the denominator, we find the expression
n
MAX
i= 1,
which simply means to take the greatestf$ of all of the components in the
portfolio.
Let’s assume a two-component portfolio, which we’ll call Spectrums A
and B. We can arrange the necessary information for determining the upside
limit on active equity in a table as follows:
Component f$ Margin Greatestf$/f$Spectrum A $2,500 $11,000 2500/2500= 1
Spectrum B $1,500 $2,000 2500/1500=1.67