The Margin Rule That Powers Collateral Compounding
Reg T doesn’t lend you money. It unlocks buying power from the portfolio you already own.
“No, you're not borrowing money — and here's why.”
Most people hear margin and picture debt. They imagine interest charges, margin calls, and leverage gone wrong. They assume that using margin means borrowing — and borrowing means risk.
But Regulation T doesn’t work like a credit card.
If you’ve ever used a margin account to sell an uncovered put — especially as part of our Collateral Compounding strategy — you’ve probably noticed something odd:
No money leaves your account
No loan is issued
And yet the trade goes through, and premium hits your balance immediately
What’s happening isn’t borrowing. It’s collateralization — and it’s governed by a rule most investors have never actually read: Reg T.
In this post, we’ll explain exactly how it works — where your buying power comes from, what your broker is doing behind the scenes, and why Reg T margin is the engine, not the enemy, behind this strategy.
By the end, you’ll know more about how your account works than 90% of investors.
What Is Reg T? (And Why It Matters Here)
Most investors never read the rules that govern their accounts. But every time you place a trade in a margin account, you're operating under Regulation T — a Federal Reserve rule that’s been in place since 1934. It was designed to limit excessive leverage during speculative bubbles. But in our case, it quietly powers everything we do.
So what is it?
At its core, Reg T sets the margin requirements for retail brokerage accounts in the United States. It tells your broker:
How much you must deposit to buy stocks on margin (initial margin)
How much you must maintain to keep those positions open (maintenance margin)
And — crucially for us — how much collateral is required to sell options without cash backing them
In simple terms, Reg T governs how much of your existing portfolio can be used to support new positions.
Why It Exists
After the 1929 crash, regulators realized that investors were often trading with just 10% down — borrowing the other 90% to buy stocks. When prices fell, forced liquidations made everything worse. So in 1934, the Federal Reserve introduced Reg T to clamp down on that kind of leverage.
Today, Reg T limits you to 50% initial margin for most equity purchases. If you have a $100,000 portfolio, you can buy up to $200,000 worth of stock, assuming all securities are marginable. That’s 2:1 leverage — a far cry from the 10:1 practices of the 1920s.
But Collateral Compounding doesn’t use that buying power to load up on new shares. Instead, we use a small, controlled slice of it to sell puts — without posting a cash reserve.
How Reg T Applies to Our Strategy
When you sell a put in a margin account, you're not borrowing money. You're taking on an obligation — the potential to buy stock at the strike price. Reg T governs how much collateral must be set aside to support that obligation.
This collateral is not cash out of pocket. It's a slice of your portfolio’s existing value — a reserve your broker earmarks in case the trade goes against you. That’s what we mean when we say we’re using margin capacity: we’re tapping into a rule-based allowance based on the value of the stocks you already hold.
The exact requirement varies by broker and trade specifics — but the principle is consistent:
Under Reg T, you can write options without posting cash, as long as your portfolio can support the risk.
We’ll break down the specific math — with real trade examples — in a later section. For now, just know this:
Reg T isn’t a loophole. It’s the rule that makes Collateral Compounding possible.
Why We’re Not Borrowing
Think of your broker like a hotel. When you check in, they don’t charge your credit card for damages — but they do place a hold. That hold isn’t money spent. It’s just a safeguard. If everything goes smoothly, it’s released and the amount put on hold never hits your monthly statement.
Selling puts in a margin account works the same way. Your broker doesn’t hand you money or deduct from your balance. They simply set aside part of your portfolio’s margin capacity — just in case you get assigned.
But that’s not the whole story.
The Broker Isn’t Just Placing a Hold — They’re Checking Who’s Checking In
If you’re running a hotel and a quiet business traveler shows up, the hold might be small. But if a rock band walks in at midnight with three guitars and a fog machine, you’re going to be asking for a reserve for a lot more than the value of the minibar.
That’s how your broker thinks too.
If you’re selling .30 delta puts on quality stocks, and only taking on assignment risk equal to 25% of your portfolio’s long value, the margin requirement — the “hold” — is modest.
But if you’re selling at the money puts or calls, or putting on positions that could theoretically lose more than your entire portfolio is worth, the broker starts acting like a nervous hotel manager. The hold gets bigger. Fast.
Reg T gives brokers a framework for these decisions, and FINRA rules spell out the minimums. But the sizing is dynamic — based not just on the trade structure, but on how reckless you’re being.
That’s why Collateral Compounding stays well within the lines. We don’t max out. We don’t sell high-delta options. We don’t bet the house. We stay boring — by design.
The Key Distinction
We’re not borrowing. We’re not leveraging up.
We’re just securing smart obligations — modest, well-structured put positions — with excess margin capacity that’s already sitting in your account. No interest. No debt. No disruption to your core portfolio.
And if you run the strategy as designed — with defined sizing, low-delta entries, and clear exits — your broker barely blinks when you check in.
Where the Buying Power Comes From
If you own $100,000 worth of stocks in a margin account, you already have access to Reg T margin capacity — even if you’ve never used it before.
Under Regulation T, most marginable stocks can be purchased with 50% down. That means:
Your $100,000 long portfolio supports up to $200,000 in total exposure
You've already used $100,000 of that buying power to hold your existing positions
That leaves you with $100,000 of unused margin capacity
This is the raw capacity your broker sees. But in our strategy, we don’t use all of it. Not even close.
Real Example: Selling a Put on NVDA
Let’s say NVDA is trading at $150, and you sell the $135 strike put, about two months out, with a .30 delta.
You collect $4.30 per share, or $430 per contract
You take on the obligation to potentially buy 100 shares at $135 — a total of $13,500 if assigned
That $13,500 is what we call your assignment budget. It’s the real-world risk — the cash you'd need if you were assigned the shares. And it's the number we use to size trades safely.
Reg T Margin Required for This Trade
Let’s see how much of your margin capacity this trade actually uses.
Using the Reg T formula for short puts:
Now let’s plug the numbers into our example and see how much margin is actually used for this trade:
Your broker sets aside $1,930 of your $100,000 margin capacity. That’s less than 2% of what’s available to you.
And notice the gap:
You’ve taken on $13,500 of potential assignment risk
But you’re only using $1,930 of margin capacity to support it
That’s the power of Reg T — and why our strategy works. Your margin account gives you far more capacity than you need, as long as you size trades thoughtfully and stay disciplined.
Assignment Budget vs. Margin Capacity
This distinction matters:
Assignment budget: What the trade would cost if assigned — real money, real obligation
Margin capacity: What your broker sets aside as collateral — not borrowed, just reserved
We cap your assignment budget at 25% of your portfolio when you’re starting out — that’s $25,000 on a $100,000 portfolio. And in practice, the actual margin requirement to support that entire $25K of potential risk might only be $3,000 to $5,000.
So while your broker sees room to let you swing a sledgehammer, we’re using that space to build with hand tools — carefully, selectively, and with a safety net under every trade.
Reg T vs. Portfolio Margin
If you’ve poked around your broker settings, you may have come across something called portfolio margin. It’s a more flexible margining system, typically available to accounts over $150,000 with higher risk tolerance and approval.
And yes — it can lower your margin requirements on certain trades.
But let’s be clear:
You do not need portfolio margin to run this strategy.
Reg T — the standard default for most brokerage accounts — gives you more than enough buying power. In fact, even under Reg T, you could sell puts representing up to 100% of your long portfolio value and still remain within the rules.
That’s the upper limit of what we’d ever recommend. In practice, we typically cap assignment risk at 25% for beginners and 50% once you’re ready — which means we’re using only a fraction of your margin capacity. So while portfolio margin might be helpful for some uses, it’s overkill here.
Reg T is simple, reliable, and entirely sufficient for compounding high-quality equity exposure using this strategy.
Margin Isn’t Our Enemy — It’s Our Engine
Most investors are taught to fear margin. And for good reason: used recklessly, it can blow up any portfolio, even one made up of quality stocks. But what we’re doing isn’t reckless. It’s structured, conservative, and designed to leave your core holdings untouched.
Reg T margin is what makes that possible.
It doesn’t lend us cash. It doesn’t charge us interest. It doesn’t interfere with what we already own. It simply recognizes that our existing portfolio has value — and lets us put that value to work.
That’s how we’re able to sell puts without spending cash and build new equity exposure — without ever pulling capital from what we already believe in.
You don’t need portfolio margin. You don’t need leverage. You don’t need complexity. All you need is a margin-enabled account, some unused buying power, and a plan for how to use it wisely.
Margin isn’t something to fear. It’s a tool — and in our strategy, it’s the engine that drives the whole system forward.
Used poorly, it can magnify mistakes. Used well, it quietly compounds your portfolio — one deliberate position at a time.