Trading Dominion – Ray Dalio – Portfolio Margin and SPAN Margin Trading Tactics

Why use portfolio or SPAN margin?Most people think that portfolio margin (PM) or SPAN margin is just used by traders who want to get significant leverage, and therefore need to be comfortable taking larger risks.There certainly is leverage with portfolio or SPAN margin, but what most people don’t realize is that, if used properly, you can use PM or SPAN margin in order to construct risk profiles which are much safer than what you could construct with RegT margin. There are even certain trade types which are completely not viable at all with RegT margin, and can only be done with PM or SPAN margin.This course will teach you how PM and SPAN works, how to construct, and how to manage trades which are specific to PM and SPAN.We primarily focus on creating trades which have muchmore safetythan RegT trades, such that even in the event of a black swan your overall portfolio is protected.How much can you expect to make?Let’s just pick a generic number. If you can consistently make a 20% return on your entire account every year, then you would be performing at levels comparable to the best hedge funds in the world.So let’s apply this yearly return to the criteria we had listed above. We had mentioned that most people will teach to only trade 20% of your liquid net worth, and then keep 50% of your trading account in cash.If you had a liquid net worth of $500K, then you could have a trading account of $100K and you would actively be trading $50K of that account.If you were to then make a 20% yearly return on your traded capital of $50K, that comes to $50K * 20% = $10K profitper year.Even if you were to trade your entire $100K, and not implement the suggestion of keeping 50% in cash, then you would be making $20K per year, on the assumption that you had a total liquid net worth of $500K.Isn’t black swan protection expensive?Think of black swan protection as insurance for your trading account.Do you spend money on car, home, health or life insurance? Of course you do, and you likely couldn’t even imagine being without it.So if insurance is so important, then why wouldn’t you insure your trading account, which may contain a large portion of your net worth?Most traders would answer “because it’s too expensive and black swan events are very rare”.How often do you plan on getting cancer? How often do you plan on kicking the bucket? Just because we only plan to die once isn’t a reason to not have life insurance. Just because we don’t plan on getting cancer every year is not a reason to not have health insurance. So just because an event is rare, this is no reason to not have insurance to cover that risk.I’m willing to bet that you’ll see many more black swan events than the number of times you’ll get cancer or die.Another very important point is that out-of-the-money structures are much easier to protect against black swans than at-the-money structures.In this case, “easier” implies much cheaper, and getting a good return on margin for out-of-the-money structures can only be done with portfolio or SPAN margin.Black swan protection does cost money though, so in the course we tend to address this in three ways:Does it scale?We have multiple people in our community who trade in large size.There are various members in our community who run hedge funds; some with millions of dollars under management.We also have many private individuals who simply trade their own money, but do so in large size. For example, one of our members tends to trade 600 tranches of our trades at a time.You can therefore start with just a single tranche, which may have a portfolio margin as low as $5K and planned capital of $10K, but also have the confidence of knowing that as your account gets larger and larger, that you’ll still be able to do the same trades in much larger size.