initial margin requirement question

Discussion in 'Risk Management' started by pepper_john, Jan 1, 2013.

  1. I have a basic question about initial margin requirement and hope someone can help me. I have a regular margin account with IB and have $20000 in the account , and suppose spy was trade at 100 yesterday and I bought 200 share of spy at this price. If tomorrow I want to buy another 50 shares of spy, do I violate the initial margin requirement since the cash in my account is zero? If so, can I work around by first selling the 200 shares of spy that I already have and then long 250 shares of spy?

    Many thanks in advance.
     
  2. You can simply buy another 50 shares. Look up the line "buying power" inside your account window. You will have no cash remaining, but you will see that you still have buying power remaining. That's what counts in this case.

    The formula for calculation of "buying power" can be found on the IB website.
     

  3. Thanks for the help. I found this,

    "To calculate buying power IB compares Current Equity with Loan Value to Previous Day Equity with Loan Value. Whichever figure is lesser is used. From the lesser of these two figures, the Initial Margin Requirement on the positions you currently hold in the account is subtracted. The difference is then multiplied by the current leverage amount (at present 4:1), which results in your intraday buying power. "

    http://ibkb.interactivebrokers.com/node/335


    Am I correct to understand that "Current Equity with Loan Value" is the market values of all the open positions?

    Also is this only for intraday buying power?
     
  4. Achill

    Achill

    Calculating only buying power and initial margin req is not enough.
    What really matters is your "staying power" if the market moves against you.
    Depending on your objective and your exiting strategy, it's a must that you should calculate your bp if the price falls, say 20%.
    If you don't do this, you'll be pretty much surprised geting a margin call.
     
  5. Check your cushion. Don't let it drop below 20%.
    Below 5% you get a warning and If Your cushion becomes negative, you get liquidated.
     
  6. Also remember you have to pay overnight interest rate for cash borrowed from your broker.
     

  7. thank everyone for your input. Basically I am trying to incorporate some rules about margin requirements into my system. Since each broker has different margin requirements, do everyone here use different rules for different brokers?
     
  8. JackR

    JackR

    The terminology can be confusing.

    Initial margin can be up to 50% of the purchase. (2:1)
    Intraday margin can be 25%. (4:1)

    Say you have $20,000 cash in your account. Regulation T ( a quasi-government regulation - set by the Federal Reserve) allows the broker to loan you another $20,000 to buy stocks. (2:1)

    You buy $40,000 worth of stock. You are now at 50% (1/2 your money - 1/2 your broker's loan). That is the maximum the broker may lend you on a stock purchase.

    Once you are into the stock you must maintain a maintenance margin. It must be a minimum of 25%. But the normal percentage is generally greater, is set by the broker and can change at their whim. What this means is that once you are in a position its value can decrease to some degree without the need to sell it or add more money to the account. Do not confuse with the 25% intraday margin. Any intraday purchase that uses 25% margin must be closed or reduced to the 50% level by the end of the day.

    In the case of IB, they generally, especially during periods of high volatility, raise the maintenance margin and the initial margin higher than many other brokers do. IB is very risk averse.

    Unlike many brokers IB does not issue what I think of as a margin call. Many brokers give you two or three days to get more money into the account. IB does not. If your IB account becomes under-margined there will be a pop-up message on your TWS advising that you are getting close to limits and then a subsequent message saying, in effect, do something to get this under control or we will do it for you. Shortly thereafter, how long has always been a mystery, IB will sell stuff to get your account back with their margin parameters. Also, if you are using intraday margin, be aware that IB does not let you go to the market close. They will close you out about 10 minutes before the close to ensure you can meet margin requirements at the close. This is not good for you as they seem to use market orders, not limit orders.

    IB has some of the absolute lowest margin interest charges in the retail business.

    If you are going to write program parameters for different brokers you'll have to check with each. Futures, by the way, do not work on margin, they use performance bonds. So look them up if you ever get interested in that area.

    If you are new to this stuff, especially if you are going to be doing system trading, be sure to read about Pattern Day Traders (PDT). Although margin can be involved, the frequency of trading drives PDT rules.

    Jack
     
  9. Jack, many thanks. I don't day trade, but found automating the margin requirements tricky as it is broker-dependent and time-dependent as you mentioned.


    I was once issued a margin warning by IB but I checked that my account satisfied the margin requirements. IB did not do anything. Next day I sold some positions and then the warning dis-appeared. I should have called IB to find out what caused the warning message.
     
  10. JackR

    JackR

    PepperJ:

    No problem. It took me forever to geta handle on margin and I didn't even get into using the appreciated value of your account to buy more, the infamous special miscellaneous account, etc., etc.

    For your info here is another thread just posted concerning IB's risk averse approach to things -

    http://www.elitetrader.com/vb/showthread.php?threadid=256759

    Jack
     
    #10     Jan 9, 2013