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Basic long/short margin question

Let's say you have a $10,000 portfolio. You want to buy stock A which trades at $100 and short stock B which also trades at $100, at 150%/50% respectively.

So you buy 150 shares of A and sell 50 shares of B.

Let's assume for the moment that maintenance margin requirements are 30% on both stocks. So right now your maintenance requirement is $6,000 (right?)

Can somebody help me understand what happens to your maintenance margin requirements if both stocks A and B fall in price by $X? Say they both fall from $100 to $50.

4 responses

Eii! Margin calculations are annoying. I can't attach a spreadsheet here, but in your above example, I believe the value of your position in A drops from $15k to $7.5k and your loan on position B drops from $-5k to $-2.5k, so your overall portfolio equity drops from $10k to $5k, while your margin requirement drops from $6k to $3k. $5k > $3k so you still don't get a margin call.

I think I have that right. IB has some examples here:

See, that's what I thought too (based entirely on IB's margin examples), but then I tried seeing what would happen if both stocks dropped by 90%, and it somehow appeared I still wasn't getting a margin call (which seems weird - you'd think they'd want their money back before that point).

Well, if the long goes down and the short goes up, you'll quite quickly get a margin call...

Or, if you use more margin. A 30% margin means you could have more notional than that, on a $10k equity base, and then that would also quite quickly flame out...