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MARGIN


An investor trading on margin is borrowing funds from their broker dealer to facilitate a portion of the buy or short sell of a security. The investor is charged interest at the current broker call rate on any margin balance held in the account. The broker call rate will generally be tied to current interest rates. Many broker dealers reduce the margin interest rate for higher margin account balances.

To utilize margin within an account, an investor must have a minimum amount of funds, know as a margin requirement. This requirement is the dollar amount needed to trade on margin and can change daily with fluctuations in the value of securities or the account. When an investor has more than the funds needed to cover any requirement, the account will have additional margin available. The two types of margin available are buying power and cash available. Buying power is the amount an investor can utilize to buy additional securities. Cash available equals the amount an investor can withdraw from the account without having to liquidate a security. Cash available is used to determine the funds available for option trading.

When an investor purchases a security inside a margin account without sufficient funds to cover the balance, a margin call is issued. There are two types of margin calls, a fed call and a maintenance call.  An initial purchase generates a fed call. A decline in the value of an account or security can generate a maintenance call. With either call an investor has 3 days to cover the balance due or file for a 2 day extension. An increase in overall account value or in the value in a security can allow an investor to appreciate out of a maintenance call. A fed call cannot be appreciated out of and must be covered within the 3 days, unless an extension is received.

Margin requirements vary depending on the security. A broker dealer can change the requirement for a security at their discretion if they feel the securities inherent risk has increased. Change in a securities price can dictate the margin requirement as well. Typically a security trading under $5 will have an increased margin requirement or may not be approved for margin trading. 

A day trade is a buy and sell or a short and cover of  the same security in the same day. A pattern day trader is defined as an investor that day trades 4 or more times in 5 business days, where the number of day trades equal more than 6% of the total trading activity over the same 5 day period. A pattern day trader must maintain minimum equity of $25,000 on the day of the trade. Pattern day traders can trade up to 4 times the maintenance margin excess as of the previous days close. If this amount is exceeded, a day trade margin call will be issued, which must be covered by deposit of sufficient funds within 5 business days.  Until the call is met, the day trader will be limited to buying power of 2 times the maintenance margin excess. If the call isn’t met within the 5 days, the account will be restricted to trading on a cash available basis for 90 days or until the call is met. Funds used to meet day trading requirements or day trading margin calls for 2 business days following the close of business of the day the funds were required.

Broker dealers may have different margin requirements. The Option Profit team has provided basic terms and guidelines for margin trading. It is imperative that an investor never utilize margin without a thorough and complete understanding of the risks involved.  An investor should also be familiar with and understand the broker dealers terms and conditions which must be met in order to utilize margin trading. 

 

Refer to Glossary for terms and definitions

Option Profit members can elect to have trade ideas sent to them via secure email notification and have unlimited access to the features of their respective memberships.  All Option Profit Trade Ideas:

  • Are sent in a timely manner
  • Include strike prices and symbols
  • Have estimated returns assuming expiration of the trade

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RISK is inherent in any investment. No individual or entity should invest with funds they cannot afford to lose. Option trading is time sensitive and involves risk including, but not limited to, loss of gains and principal. A leveraged investor risks the loss of  more than principal. Options do not have to be held until expiration and can be exercised at any point.  Option trades can be closed prior to expiration with a gain or loss being realized. It is important that you understand all trades and the risk associated before executing a transaction. The Option Profit provides broad ideas, not individual recommendations, and is not responsible for any losses incurred. Diversification is important with any strategy and should be considered when investing  Before trading consult with a financial advisor to determine if option trading is appropriate for you and your financial goals.