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I have been working on a market neutral pairs trading strategy. See https://medium.com/@nderground-net/backtesting-a-pairs-trading-strategy-b80919bff497

I am trying to understand whether I am properly estimating the margin requirement for the S&P 500 pairs.

I have talked to Interactive Brokers support about this question but they were of limited help.

My understanding is that if I have 1000 margin allocated for the long/short pair I can short 2000 of stock (ignoring share issues). This is 50% cash for the short. When the short is executed, the account will be credited with 2000 from the short proceeds.

I then take a long position in 2000 of stock with the proceeds of short.

The end balance (again ignoring share price issues) is a 2000 short position and a 2000 long position and 1000 in margin.

Is this a correct analysis of how a long/short position can be built?

Many thanks,

Ian

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  • $\begingroup$ In your example you actually have a 25% requirement on both the long and the short side, rather than the 50% you stated. Nevertheless 25% is plausible at many brokers, including IBKR, and therefore your example (supporting a 2000 usd long and a 2000 usd short on an initial cash deposit of 1000) is entrely realistic IMO. $\endgroup$
    – nbbo2
    Commented Mar 30, 2023 at 8:04
  • $\begingroup$ Why 25%? A margin requirement of ε means that if the Long Market Value is multiplied by(1-ε) and the Short Market Value is multiplied by (1+ε) the customer's equity in the portfolio is wiped out. Letting ε=0.25 you can see that you would lose 500 on the long side and 500 on the short side, wiping out the initial cash deposit of 1000. So your example portfolio is margined at 25% level. $\endgroup$
    – nbbo2
    Commented Mar 30, 2023 at 15:11
  • $\begingroup$ Thank you for the reply @nbb02. I appreciate it. My understanding is that SEC Regulation T requires an initial margin of 50%, so my example seems wrong. From the comment, it seems that with a margin of 1000, I could have 1000 short and 1000 long positions. The maintenance margin, after the positions are opened, is only 25% according to Reg T. I'll have to modify my pairs model code. $\endgroup$
    – iank
    Commented Mar 30, 2023 at 19:33

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