IB Margin Question

I know very little about margin and I am wondering if I am pushing any limits in my IB account.

Using similar ratios to my account here is a representation of my balances:

Account value 10,000
Long stk = 13,000
Short stk= 12,000
Excess liquidity= 2,800

Given that IB says I have 28% excess liquidity I assume that I am not in jeopardy of being auto liquidated. Is that correct?

How would you describe my margin situation (e.g., safe, on the edge, etc).

I know this next question is probably impossible to answer, but if another flash crash happened am I at risk?

Thanks,
Don

 

You probably want to take a look at this page to get a better understanding of margin. It also talks about auto-liquidation.

http://www.interactivebrokers.com/en/p.php?f=margin

(Click on the Example link on this page)

IMO, you are leveraged too highly at the moment, especially if your long and short positions are not highly correlated (which might happen during a crazy day, even iif they are usually closely correlated).

 

Wow, I'm glad I asked.

Although many of my long/shorts are correlated, like you said anything can happen. I don't think I would be happy if IB started willy-nilly liquidating positions.

I guess I'll add more cash or unwind some positions.

BTW, as I understand it the cash from the short positions are financing some of my long positions and therefore I am not borrowing any money from IB. Does that sound correct?

Thanks

Don

 

No, the cash from your short positions is not financing your longs, which is why I said you are leveraged too high.
You are still borrowing funds to initiate the short position, so from the example you gave, you have $25k total in equity (12k + 13k), which means you are leveraged about 2.5 : 1, given your $10k account.

You are not "financing" your positions unless you are receiving income for initiating the position (if you had sold calls against your longs or puts against your shorts, for example, in which case your "financing" would be the premium you receive for selling the option).

I'd probably lighten my position up a bit unless you were already planning on adding more cash.

 

I am adding cash to my account, but I'm still confused.

I spoke to IB and presented them with the following hypothetical position.

Account value 10,000
Long stock = 20,000
short stock=10,000

I asked "do I have to borrow any money from IB for the above positions", IB answered "no".

I summarized by saying, "then the proceeds from the short stock sale is helping finance my long stock purchase and therefore I don't have to borrow any money from IB". IB said, "that's correct".

BTW, They did say there may be a "hard to borrow" int charge depending on which stock is shorted and I am familiar with that expense.

Even if IB is correct above, I am not sure if that has any bearing on my highly subjective question of "am I heavily leveraged?".

I asked IB if they thought I was heavily leveraged. IB did not answer directly, but said that the key measurement is the "current excess liquidity" value of my account. Which in my original note was $2800. He did not seemed alarmed by my margin situation, but did say another flash crash could be a problem.

Any comments will be appreciated.

Don

 

One side note that I would like to add is that IB is a fantastic broker. Over the years I have used many brokers and none can compare to IB in virtually every area. Kudos to them.

Don

 

Without knowing what your trades prices were or your cash balance, it's difficult to answer the question.

If you want to assume the following, maybe it will help clear things up.

You deposit 10k in cash
You purchase 20k in stock
You short 10k in stock

Cash is separated into long & short for interest purposes.

Long cash = (10,000)
Short cash = 10,000

http://www.interactivebrokers.com/en/accounts/fees/interest.php

You would be charged 1.69% (as of today) for the 10k you borrowed from IB to purchase the long.

On the short cash,

1. You need to have > 100,000 USD equivalent before earning interest
2. With the current interest rates, no amount of short cash would earn any interest.

Regarding margin, assuming you had the SMA to hold the positions over night, you would need to meet 25% on the long and 30% on the short.

Long requirement = 5,000
Short requirement = 3,000

You would have 2,000 in excess liquidity and a minor market movement could cause a liquidation because of the highly leveraged nature of the account.

20,000 worth of long stock becomes worth 17,000. Your account is now worth 7k. 4250 (long requirement) + 3000 (short requirement) = 250 deficit & liquidation.

Hope this helps.

 

Thanks, I think I'm getting some feel for margin.

One point, in my discussion with IB on the above hypothetical account they said the proceeds from the short sales will finance the long positions negating the need for IB to loan any money. This sounds right since there would be $10k from the short sales why couldn't it be used? You seem to disagree with that as did TheGoonior in his reply.

If you are correct in my real account IB should be loaning me money, but I don't see any clear statement of such. Although there are some small interest charges that I thought were related to short stock borrowing. If you know of the entry name for the 1.69% int charges please advise.

In the meantime I'll poke around and see if I can find evidence to clarify this issue.

Thanks,

Don