Margin Requirements Explained

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Маржинальные требования | Margin Requirements

Маржинальные требованияангл. Margin Requirements, являются суммой средств, которые инвестор должен иметь на маржинальном счете для того, чтобы иметь возможность купить или продать активы в кредит или с использованием маржи. Главная функция маржинальных требований состоит в том, чтобы препятствовать росту долговых обязательств инвестора до такого уровня, когда он будет не в состоянии погасить их. Например, в США регуляторные положения, которые устанавливают маржинальные требования, устанавливаются Советом управляющих Федеральной резервной системы (англ. Federal Reserve Board). Во многих других стран также есть регуляторные положения, которые требуют внесения средства на маржинальный счет прежде, чем инвестор сможет торговать с использованием маржи или даже осуществлять короткую продажу акций на фондовом рынке.

В то время как маржинальные требования могут отличаться в разных странах, во многих из них созданы стандарты, которые очень похожи на стандарты Совета управляющих Федеральной резервной системы и Нью-Йоркской фондовой биржи (англ. New York Stock Exchange, NYSE). Например, регуляторные положения часто позволяют инвестору при покупке акций занимать не больше, чем половину от стоимости новой позиции. Это означает, что если бы акции стоили бы в общей сложности 250000$, инвестор должен был бы внести на маржинальный счет минимум 125000$. Если эта инвестиция окажется удачной и станет быстро приносить доходы, то инвестор сможет погасить долг и использовать баланс маржинального счета для других сделок.

Для открытых позиций по фьючерсным контрактам или некоторых типов операций короткой продажи маржинальные требования обычно устанавливаются как процент от итоговой суммы, чтобы позволяет инвестору торговать с использованием маржи. Например, для длинной позиции, инвестор должен будет поддерживать минимум 25% собственных средств на счету, или 30% для короткой позиции. Если инвестиции будут удачными, инвестор сможет избежать «маржин колл» (англ. Margin Call) от своего брокера, который возникает в случае, если рыночная цена актива по длинной или короткая позиция на маржинальном счете снизится ниже или вырастет выше определенной суммы относительно цены, по которой была заключена сделка.

Важно отметить, что маржинальные требования, которые установлены регуляторными органами и различными фондовыми рынками, представляют собой минимальные требования, которые должен выполнить инвестор, чтобы иметь возможность торговать с использованием маржи. Это означает, что брокеры могут устанавливать свои собственные маржинальные требования, которые являются еще более строгими, чем установленные законом. Выполнение этих требований не только помогает защитить инвестора, но и препятствует тому, чтобы брокер оказался в ситуации, когда клиент неспособен выполнить свои финансовые обязательства.

Understanding Margin Requirements for Selling Naked Puts

If you plan to sell put options, you need to understand the margin requirements. So we’re going to lay out the trading authorizations your broker will require in order for you to execute this type of trade and explain the margin requirements.

We frequently employ a strategy whereby we sell a put option to pay for a call option. We identify these trades as credit or debit spreads. This strategy works well when stocks are appreciating, say options trading articles. When call premium is high, selling puts to reduce the cost of the trade greatly improves the likelihood of earning a profit and enhances your return.

We know it can be frustrating to buy a call on a stock that goes up and the call loses money. Much of the time, the implied volatility priced into the options was greater than the realized volatility of the stock. As a result, the stock can rise and the option expires with little or no value.

The downside of selling a put to buy a call is that you are exposed to potentially escalating losses if the stock declines below the put strike price. At expiration, if the stock depreciates below the put strike price, you are very likely to be put the stock and assume the loss represented by the amount the stock price is below the put strike less the net premium collected.

Understanding Naked Put Selling Margin Requirements

For our examples we’ll use Charles Schwab margin requirements because they are higher than the minimums required by the Financial Industry Regulatory Authority (FINRA) and the option exchanges for option trades on basic stock. Schwab’s margin requirements are representative of the industry. You should check the specific requirements of your broker to know exactly what margin standards they apply.

Please note: Having margin clearance within your brokerage account does not mean you will be forced to go on margin with your options trades. If you have enough cash or stock holdings within your account to cover the margin requirements, then a trade will not trigger the activation of the margin (borrowing capacity) that is available to you.

Options Trading Approval From Your Broker

When you open your account with a broker, you should request options trading authorization. At Schwab, they classify options trading clearance with four categories of approvals ranging from 0 to 3. (For more on this, see Option Approval Levels Explained.)

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To buy calls, you will need to obtain at least Level 1 approval. As explained below, you can also sell naked puts with Level 1 clearance, but the margin requirements are much higher than if you have Level 3 trading authorization. If you have the necessary experience, we highly recommend you obtain Level 3 approval.

Our “spread” trade is a two-legged trade; we buy a call and sell a put. In the industry, this is often referred to as a risk-reversal trade.

The first leg of our trade involves buying a call. When you buy a call, your total risk is the amount of dollars you paid when you initiated the trade. Even if the stock goes to zero, you will have no additional liability. You will also have lost all of your initial investment. Again, if you trade with Schwab, you will be required to have Level 1 trading approval.

The other leg of our trade involves selling a put naked. Before you can consider selling a put naked, you must have:

* An account balance of at least $25,000 net equity value.

* Schwab’s Level 1 options trading authority to sell a put naked on a cash-secured basis

* Schwab’s Level 3 options trading authority to sell a put naked on margin.

Schwab does allow investors to sell puts naked on a cash-secured basis in an IRA account as long as they have Level 1 options trading authority and the account has more than $25,000 of net equity value.

What is Cash Secured?

Selling a put to open on a cash-secured basis requires that you carry the full potential cash obligation of the trade in your account.

For example, if you sell to open 10 contracts of the Palm (PALM) May 5 Puts on a cash-secured basis, Schwab requires that you have $5,000 in your account (10 contracts x 100 shares per contract x $5 stock price = $5,000 — see the sample transactions below). If you are put the stock at $5, having the cash in your account insures that you will be able to honor your purchase obligation.

Naked Put Selling on Equities — Level 3 Margin Requirements (Schwab)

Stocks $5 and Greater

The good news is the margin requirement if you have Level 3 clearance is substantially less than the cash-secured requirement. The bad news is calculating Schwab’s Level 3 margin requires doing a bit more math.

The margin required with Level 3 approval usually is the solution for the following equation:

(25% of the underlying stock’s market value + the option ask price – any out-of-the money amount) x 100 (per contract) x the number of contracts

The value of the above equation must be greater than:

* (The option ask price + 10% of the stock’s current trading price) x 100 (per contract) x the number of contracts, or

* The number of contracts x $500 per contract.

If either of these two calculations yield a higher margin amount, then the highest value is used.

Stocks Less Than $5

For stocks that are trading below $5, selling naked puts is done on a cash-secured basis in all accounts.

Example Margin Calculations

The following four examples cover stocks than range in price from $2 to $65. Schwab’s margin requirement is shown in the black box in the column entitled “Margin Required”

Exceptions

The margin requirements shown above are for equities and narrow based indexes. Broad-based indexes have lower margin requirements. Double- and triple-levered ETFs have much higher margin requirements.

In any event, always check with your broker on current margin requirements. FINRA, option exchanges and brokers change their margin requirements periodically.

If you are an experienced trader comfortable with going on margin, this can be a good tool in your trading arsenal.

But we want to emphasize again, having margin clearance within your brokerage account does not mean you will be forced to go on margin with your options trades. If you have enough cash or stock holdings within your account to cover the margin requirements, then a trade will not trigger the activation of the margin (borrowing capacity) that is available to you.

Margin Requirements – What is Margin?

All foreign exchange contracts are traded on margin. This means that traders only have to deposit a small percentage of the value of the contact traded. The result of this is incredible leverage; providing traders the means to magnify potential trading profits much more than had they been required to invest the total face value of the contract traded.

The margin must be provided before any trade is executed. It is also prudent to deposit additional funds to cover any margin requirements should the trade not perform as expected.

If markets move against the trade, the margin covers the loss until that loss is actually realised. If markets move in favor of the trade, the margin remains in the account. If markets move against the trade and then return to profitability, the margin is returned.

Margin minimises risk for both the trader and the broker, as it limits the broker’s exposure as well as the amount the trader can lose in any given trade. It is a security buffer to ensure all market participants can honor their trading obligations.

NSFX Minimum Margin Requirements

Traders must maintain Minimum Margin Requirements at all times.
NSFX offers leverage up to 1:30. This translates to margin requirements of up to 3.33%.

Margin Calls – Marking to Market

All Forex trades are “marked to market.” This means that the position is monitored in real-time to ensure that losses are covered by margin and that profit positions are also easily ascertained.

Should, at any time, a Trader’s Equity equal or fall below 50% of the Used Margin for a Trader’s Account in total, NSFX will liquidate any part of or all Open Positions in a Customer’s Account. That is why it’s important to always maintain adequate margin cover and avoid receiving margin calls.

Closure of positions is performed on a best endeavors basis, with best execution always a priority. Similarly, NSFX will attempt on a best endeavors basis to contact the trader with an Equity Notification if their equity, at any time, equals or falls below 100% of the Used Margin.

Widened Spreads

There will be certain occasions when the Bid-Ask spread widens beyond the average market spread. This is usually a result of market illiquidity such as at market open, or during rollover at 10:00 PM GMT for example, the spreads may widen in response to uncertainty regards market direction or to increased market volatility.

Trade rollover is typically a very quiet period in the market, since the business day in New York has recently closed and there are still a few hours before the day begins in Tokyo. Please be aware of these patterns and take them into consideration, particularly regarding your margin and stop out levels when trading with open orders or placing new trades.

This may also occur during news events and spreads may widen substantially in order to compensate for the tremendous amount of volatility in the market. The widened spreads may only last a few seconds or as long as a few minutes. NSFX highly recommends traders use extra caution when trading around news events and always be aware of their account equity, usable margin and market exposure as widened spreads can adversely affect all positions in an account including hedged positions.

Margin Requirement – Example

Following is an example of a real life forex margin and margin call.

Margin requirement depends on the leverage of the instrument – 1:20 or 1:30; and the USD value of the position. For example, the USD value of a 10,000 EUR/USD (“Mini-Lot” or 0.1 Lots) position bought at price of 1.1000 will be:

10,000 X 1.1000= USD11,000. With a margin requirement of 3.33% (1:30 leverage), it will cost USD366 to open the position.

If the EUR strengthens from 1.10 to 1.11 against the USD, the notional profit will be: 10,000 X 1.1100=USD11,100 less USD 10,000 X 1.1000=USD11,000 or USD100.

If the EUR weakens from 1.10 to 1.09 against the USD, the notional loss will be: 10,000 X 1.1000=USD11,000 less USD 10,000 X 1.0900=USD10,900 USD or USD100.

To keep a losing position open, traders must have sufficient funds in their account to cover the marked to market loss.

Using the above example with a margin requirement of 5.0% (1:20 leverage), results in a cost of USD550 to open the position (10,000 X 1.1000= USD11,000 X 5% = USD550).

Standard Lot
(units 100,000) 1.0 Lot
Mini Lot
(units 10,000) 0.1 Lots
Micro Lot
(units 1,000) 0.01 Lots

* The above illustrations are mere fictitious examples and are not to be construed in any way to constitute investment advice.

Margin – Disclaimer

Margin requirements may change from time to time. In order to prevent any confusion, NSFX Ltd., will always, on a best endeavors basis, make its best attempt to inform traders about any projected Margin Requirements Changes via email or phone.

Hedged Margin

“Calculate hedged margin using larger leg” enables the mode of calculation of margin using the larger position. For example, if there are two hedging positions of one symbol, but with different volumes – sell 1 Standard Lot EURUSD at 1.1268 and buy 2 Standard Lots EURUSD at 1.1260, then the total margin will be equal to the margin of the larger position (2 Standard Lots EURUSD at 1.1260).

An example using 1:30 leverage.
2 Standard Lots x 1.1260 / 30 = €7,506.7
Should your account be denominated in USD or GBP, the Base Currency Margin, in this case €7,506.7, requires a currency conversion from € to GBP or USD.

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Margin Trading Explained For ETF Investors

Talk to anyone who has lived to see (and survive) a bear market and allude to “leverage” and “margin.” Now watch them cringe. Trading on margin is a high-risk strategy that has been around for ages, helping seasoned veterans to multiply their profits and enticing rookies to empty their pockets in hopes of profits. While many are quick to draw parallels between margin trading and gambling at the blackjack table with borrowed money, the fact of the matter is that investing with margin is very common among professional money managers of all sizes; however, because it’s so risky, and there are countless horror stories in the news about rogue traders losing fortunes in minutes, merely hearing about it strikes a pessimistic tone among investors [see How To Take Profits And Cut Losses When Trading ETFs].

In reality, margin trading is an advanced concept that warrants a closer look from anyone looking to grow their arsenal of strategies. Similar to all advanced financial instruments, investing with margin requires a certain degree of experience, which is why first-time buyers on margin are often left with a sour taste and a smaller account size. As such, here we cover the basics of trading on margin, detailing the inherent risks and rewards, as well as showcasing a real world ETF trading example.

What Is Buying on Margin?

Buying on margin refers to borrowing money from your broker to purchase a bigger position than you have sufficient funds for. In other words, “margin buying” refers to a loan from your brokerage that can be used to buy more stock than you normally could afford. So how do you do it? To buy on margin, you need to have a margin account from your broker; this is different from a regular cash account, in which you are restricted to only using the money that’s actually in the account. Most brokers will give you margin account privileges as long as you meet the minimum margin, which refers to the smallest deposit necessary, generally around $2,000 [see How To Be A Better Bear: Short Selling vs. Inverse ETFs?].

In most cases, once your margin account is up and running you can borrow up to 50% of the initial purchase price of a given security. For example, if you had $10,000 in your account, your buying power would be as much as $20,000 if you were to utilize the full margin.

Like all loans, buying on margin will incur interest charges in your brokerage account based on the amount you have borrowed. Furthermore, there is the restriction of maintenance margin, which is the minimum funds in your account that must be maintained before your broker will force you to deposit more cash or sell some positions to repay the loan, referred to as a “margin call.”

Essentially, buying on margin simply allows you to leverage your assets; however, investors should bear in mind that leverage is a double-edged sword.

What Can You Buy on Margin?

The Federal Reserve Board officially regulates which securities are “marginable,” meaning that not all securities can be bought on margin. Individual brokerages have their own list of restrictions so it’s best to check with them, but for the most part, brokers will allow you to purchase most stocks trading above $5 a share, mutual funds, ETFs, and investment grade fixed income securities (municipal, corporate, or government) on margin. Margin requirements for option trading are complicated and generally vary from brokerage firm to brokerage firm [see 7 Rules ETF Day Traders Must Know].

Securities that cannot be purchased on margin due to the inherent risks involved, include: stocks under $5 a share, penny stocks, over-the-counter bulletin board stocks, and initial public offerings (IPOs).

What Are the Risks and Rewards of Buying on Margin?

As mentioned at the start of this article, buying on margin is synonymous with the concept of leverage. Remember that 50% margin allows you to buy up to double the amount that you could normally afford of a particular security. Because you are investing borrowed funds, buying on margin gives you the potential to greatly amplify your profits; likewise, if the trend turns sour, your margin trade can leave you in a bigger hole than you could have imagined [Download 101 ETF Lessons Every Financial Advisor Should Learn].

Below we offer several examples of how this sort of leverage can work for you and what happens when it goes against you. Note that for simplicity’s sake, these examples exclude trading commissions and interest charges; also we will assume that your account has a starting value of $10,000 and you intend to purchase the State Street SPDR (SPY, A), which is hypothetically trading at $100 a share.

Buying Without Margin and Price Increases $5

Shares Purchased Initial Investment Total Proceeds Net Gain
100 $10,000 $10,500 $500

In this straightforward scenario, a $10,000 investment generates a $500 profit after SPY jumps $5 a share.

Buying With Margin and Price Increases $5

Shares Purchased Initial Investment Total Proceeds Net Gain
200 $10,000 $21,000 $1,000

If you used margin in this same scenario, a $10,000 investment gives you $20,000 of buying power, which generates a $1,000 profit after SPY jumps $5 a share. After you close this transaction you will have proceeds of $21,0000, of which $10,000 are borrowed funds, thereby leaving you with a $1,000 gain on your initial investment of only $10,0000.

Buying Without Margin and Price Decreases $5

Shares Purchased Initial Investment Total Proceeds Net Gain
100 $10,000 $9,500 ($500)

In this straightforward scenario, a $10,000 investment generates a $500 loss after SPY drops $5 a share.

Buying With Margin and Price Decreases $5

Shares Purchased Initial Investment Total Proceeds Net Gain
200 $10,000 $19,000 ($1,000)

If you used margin in this same scenario, a $10,000 investment gives you $20,000 of buying power, which results in a $1,000 loss after SPY drops $5 a share. It’s important to recognize that in this example, when using margin and the market heads south, you will receive $19,000 in proceeds after closing the position originally worth $20,000; this means that you are effectively taking on a $1,000 loss from your original cash investment of $10,000 because you used borrowed funds.

The Bottom Line

Buying on margin should be entirely avoided by novices as this strategy can result in significant losses. Like all loans, margin buying will incur interest charges to your brokerage account. Remember that buying on margin is effectively using borrowed funds to gain leverage, which is a double-edged sword; those who have experience with buying on margin can utilize it to greatly amplify their returns, while the less-experienced are bound to get burned.

Follow me on Twitter @SBojinov

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Disclosure: No positions at time of writing.

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