Hedging positions margin impact

The margin requirement for two hedged positions on the same asset would depend on the specific rules of the brokerage and the type of asset. However, in general, each position would have its own margin requirement, regardless of the overall net position. This is because each position carries its own risk and the brokerage needs to ensure that you have enough capital to cover potential losses on each individual position.

For example, in the case of derivatives like options, long options have zero maintenance margin requirement and their initial margin requirement is only the premium that you pay upfront. However, if you have a margin requirement of $29,150 to purchase an in-the-money call Option contract, and a margin requirement of $101,499 to sell an out-of-the money call Option contract, the total margin requirement is $130,649. But if these positions compose a bull call spread, the margin requirement could be $0. This is because a bull call spread is a type of options strategy that is designed to profit from a moderate rise in the price of the underlying asset, and it involves the simultaneous purchase and sale of call options.

In the context of QuantConnect, the brokerage model of your algorithm automatically sets the buying power model for each security, but you can override it. To manually set the buying power model of a security, you can call the SetBuyingPowerModel method on the Security object.

Here is an example in Python:

# In Initialize
security = self.AddEquity("SPY")
security.SetBuyingPowerModel(...)

Please note that the specific implementation of the buying power model can vary depending on the brokerage and the type of asset. Therefore, it's always a good idea to check with your brokerage for the specific margin requirements for your positions.

Sources:

• QuantConnect Documentation: Buying Power
• QuantConnect Forum: Hedging
• QuantConnect Forum: Security Margin Requirements

I'm talking in the context of Forex for backtesting purposes. So specifically, how does LEAN handles hedged positions margin during backtesting?

In the context of Forex and backtesting with LEAN, each position would have its own margin requirement, regardless of the overall net position. This is because each position carries its own risk and LEAN needs to ensure that you have enough capital to cover potential losses on each individual position.

In LEAN, the default leverage for Forex is 50x, which means that for every dollar you have, you can control $50 in a Forex trade. If you want to change the leverage, you can use the SetLeverage method on the Security object. Here is an example in Python:

# In Initialize
forex = self.AddForex("EURUSD")
forex.SetLeverage(5.0)

The margin used for a Forex trade in LEAN is calculated as the absolute quantity of the position divided by the leverage. For example, if you have a leverage of 50x and you want to buy 500% exposure to the EURUSD pair, only 10% of the available margin is used to enter the trade since 500% / 50 = 10%.

However, it's important to note that LEAN does not support hedging in the sense of holding long and short positions in the same asset at the same time. If you try to do this, LEAN will consolidate the positions. For example, if you have a long position of 100 units and you enter a short position of 50 units, you will end up with a long position of 50 units.

Sources:

• QuantConnect Documentation: Forex
• QuantConnect Forum: Hedging
• QuantConnect Forum: Margin Requirements