PORTFOLIO MARGIN PART 3:
Profit, Loss, and Expiration
BIG IDEA: EVENTUALLY, YOUR OPTION POSITION WILL
EXPIRE. KNOW WHAT TO EXPECT AT EXPIRATION.
CAPICHE? ; PRO
Please note that the examples above do not
account for transaction costs or dividends.
Use of portfolio margin involves unique and
significant risks, including increased leverage,
which increases the amount of potential loss, and
shortened and stricter time frames for meeting
deficiencies, which increases the risk of involuntary
liquidation. Client, account, and position eligibility
requirements exist and approval is not guaranteed.
Thomas Preston is not a representative of
TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the
author and may not be reflective of those held by
TD Ameritrade, Inc.
• CON TINUING OUR portfolio margin
(PM) series, let’s look at how profit and loss
are calculated, and what can be expected at
In a PM account, a position’s margin
requirement is based on two things. One,
how much the position might lose if the
price of its underlying changes by some
percentage. And two, whether volatility,
that is, uncertainty about changes in a
stock's value, moves. This is a stress test,
which is why knowing how to calculate
profit and loss (P/L), and understanding
what happens to an option position at
expiration, are important.
FIGURING IT OUT
Here’s an example to help
explain P/L. Say you buy
one share of XYZ at $50. If
the price rises to $51, you
can make a $1 profit. If the
price drops to $49, you lose
$1. Multiply that profit or
loss by the number of shares
you own, and you have the
Now, PM tests the P/L if
the underlying changes. In
other words, what’s the P/L
if XYZ drops 15%? If you're
long 100 shares of XYZ at
$50, and XYZ drops 15%, the
price of XYZ drops by $7.50
($50 x 15%) and goes from
$50 to $42.50. The loss on
100 shares would be $750.
P/L for options works the same way, except that for most equity options, when the
option price changes $1, the P/L changes
$100 because of the option’s 100 contract
multiplier. So if you buy one 50-strike call
on XYZ for $3, and the value of the option
drops to $2, the loss is $1 x 100, or $100. If the
call option rises from $3 to $3.50, the profit
would be $50.
REALITY AT EXPIRATION
The PM algorithm calculates the theoret-
ical value for the options in the account
positions. It comes up with a theoretical P/L
based on changes in the underlying price
and volatility. You don't need to figure this
out, but you should know that at expiration,
an option will either be out of the money
(OTM) and worthless, or in the money (ITM)
and worth its intrinsic value (di;erence
between stock price and option's strike price).
Remember, the intrinsic value of a call is the
prevailing stock price minus the call’s stock
price. The intrinsic value of a put is the put’s
strike price minus the prevailing stock price.
For example, if you buy a 50-strike call
for $3, and the stock is $49 at expiration,
the 50-strike call is OTM, which means it’s
worthless at that time. The P/L would be ($0
– $3) x 100 = $300 loss.
If you buy a 50-strike call for $3 and the
stock is $52 at expiration, the call will have
$2 of intrinsic value. The P/L on the long call
would be ($2 – $3) x 100 = $100 loss. If the
stock is $55 at expiration, the call will have
$5 of intrinsic value. The P/L on the long call
would be ($5 – $3) x $100 = $200 profit.
EXERCISED OR ASSIGNED?
These P/L calculations assume you close the
ITM option position at expiration. If an option
is ITM at expiration, and is not closed before
the close of trading, it will likely be exercised
or assigned and turned into stock. ITM long
calls and short puts turn into long stock, while
ITM short calls and long puts turn into short
stock. If the stock is exactly at the strike price
at expiration, it’s not automatically exercised
or assigned. In this case, if you’re long that
option, you’ll have to notify your broker of the
intention to exercise it. And the person who’s
short that option doesn’t know if it will be
assigned because it depends on whether or
not the long option holder exercises it.
Now that you have some idea of how theoretical P/L is calculated in a PM account, you’ll
know what to keep an eye on as your option
approaches expiration. Don’t end up owning
something you didn’t want.
To learn more about
watch the video at
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