Vincent; Thanx and most of this makes better sense to me than
how I thought the broker explained it, I should have had him
write down some examples like you did, as it just didn't seem
right.
so to run it back,
RE > That's not how I understand it. I believe you mixed Initial Margin Requirement with Maintenance requirement. Initial Req requires 50% margin, i.e. when you have $10K cash, you can buy $20K worth of equity, say 2000 shares of XYZ @ $10 a share(i.e.
your stock buying power is $20K), or $10K worth of option on margin. That is essentially the 50% margin requirement.
After you bought the $20K stock, your Equity/Margin ratio is now
$20K-$10K)/$20K = 50%, and your buying power is 0. The maintenance
requirement is now in effect, which means you should always maintain that this ratio is >
30% at Waterhouse (RegT calls for 25%, and other broker requires 35%, as did Waterhouse up until Jan 1999).
So let say the stock you own, XYZ, retreat to $7. You now have $14K worth of equity and a margin balance of $10K, so your ratio is now ($14-$10)/$14 = 28%, and that should trigger a margin call.
The above makes sense to me, and it is clear enough that I
can disregard what I thought he was saying, at least I wasn't about
to take for granted that he explained it right not after I thought
about it . He may have known what he was talking about but
worded his explanation poorly,and to were I had to do a double take.
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Next Item if it's not to much trouble,
Covered calls do not affect your equity at Waterhouse (well, the short call does, but the stock does not). At Fidelity, your equity value is reduced by the amount of the short call that is ITM.
Well I think you answered my question, The stock I own is still
good to use as equity to margin on even if I have sold covered
calls, ( but I would assume if those calls came in the money
ie the stock went above and is subject to call ) then that point
would be the limit I could use.
Hence if I sell deep in the money calls I reduce the point of
usable equity to the strike price ? even if they don't spell
it out I would be cautious there.
Is that what you refer to as a Short Call ?
If So I got it. :-)
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Last Item ; & it goes over my head some.
Re As for shorting, RegT says that you can short up to your stock buying power (or 150% = 50% of margin in the long purchase above + proceed of sale). After the initial requirement, the maintenance requirement is calculated similar to the long position mentioned above.
Lets say I'm long the 1000 shares of X $10 stock , and it stays
where it's at, So that's 10K , if I short Y $10 stock then I
can short 2000 shares ? = 20K , this may be were he confused me,
and I think I still am , but it don't look as risky ( as after all they have the 20K in my Short account )
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As for calculating it simualar to the Long position,
I'm a bit lost as how to handle the 20K in my
short account, ( that is if I can short 20K of Y with 10K of X at
all ? ) Lets say X stays where it's at But Y moves up $3
and I'm in the red 6K from being able to cover Y,
I know I have to sell off 6K of X , to cover so I'm down to
is this like (30K-26K ) / 6K ?
Actually I've never shorted more than I have had in equity
and cash in fact not as much as that, opps yes I did too
but it was just a day trade in fact I think maybe they let me
exceed the limit ? it was like $1 incash; to $2.5 short in dollars
was that an over sight ? here again they had the 1 + 2.5, and
I was out before it moved the wrong way.
Trading the spiders they don't move all that fast that even
with 1 to 3 I know I'll keep enough cash on hand to cover
what ever small move they could make against me with out having to sell any long positions this short side does have my interest, as these trades are not like home runs I'm just scalping a little momentum and leverage is about the only way to make most of them worth playing.
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The only short I'v held any real amount of time is normally
paired off with a long,
MDY (S&P400) short, vs VINFX ( S&P500 ) long , I'v concluded
that over time the 500 beats the 400 , and can hold it when
expecting some downside momentum with plans to let the
short run for a while as I leg out of the long in a market
correction.
For short time spans the 400 can out run the 500, but as the
market loses it's liquidity and starts down that gets fixed
fast. I use the VINFX so as to balance the $ when I go in
them both.
----------------------
Thanx much for your help,
Jim
Ps.
quicken.excite.com
-------------
My best call of the year
Message 5214259
I've been trying to get a handle on that QQQ since
it came out, ( it front runs the NDX a lot so it's harder
to get as much of it's move , but it moves more than the
other spiders )
Subject 26037
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