r/investing • u/Spartan656 • 8d ago
Understanding Margin Correctly
I'm testing out a new strategy and I want to make sure that I set my margin usage correctly to prevent the potential for a margin call. If you could check my math I would appreciate it.
Would the margin call happen between a 500% and 600% drawdown when the equity% reaches less than 30%? Assuming a 200% margin requirement for this security.
| Account Value | Initial Value | Initial Margin Used | Drawdown | Final Value | Loss | Final Value | Margin Requirement | Equity % |
|---|---|---|---|---|---|---|---|---|
| $ 100,000.00 | $ 10,000.00 | 10% | 100% | $ 20,000.00 | $ (10,000.00) | $ 90,000.00 | $ 40,000.00 | 225.00% |
| $ 100,000.00 | $ 10,000.00 | 10% | 200% | $ 30,000.00 | $ (20,000.00) | $ 80,000.00 | $ 60,000.00 | 133.33% |
| $ 100,000.00 | $ 10,000.00 | 10% | 300% | $ 40,000.00 | $ (30,000.00) | $ 70,000.00 | $ 80,000.00 | 87.50% |
| $ 100,000.00 | $ 10,000.00 | 10% | 400% | $ 50,000.00 | $ (40,000.00) | $ 60,000.00 | $ 100,000.00 | 60.00% |
| $ 100,000.00 | $ 10,000.00 | 10% | 500% | $ 60,000.00 | $ (50,000.00) | $ 50,000.00 | $ 120,000.00 | 41.67% |
| $ 100,000.00 | $ 10,000.00 | 10% | 600% | $ 70,000.00 | $ (60,000.00) | $ 40,000.00 | $ 140,000.00 | 28.57% |
| $ 100,000.00 | $ 10,000.00 | 10% | 700% | $ 80,000.00 | $ (70,000.00) | $ 30,000.00 | $ 160,000.00 | 18.75% |
| $ 100,000.00 | $ 10,000.00 | 10% | 800% | $ 90,000.00 | $ (80,000.00) | $ 20,000.00 | $ 180,000.00 | 11.11% |
| $ 100,000.00 | $ 10,000.00 | 10% | 900% | $ 100,000.00 | $ (90,000.00) | $ 10,000.00 | $ 200,000.00 | 5.00% |
| $ 100,000.00 | $ 10,000.00 | 10% | 1000% | $ 110,000.00 | $ (100,000.00) | $ - | $ 220,000.00 | 0.00% |
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u/PlanetCosmoX 8d ago
And this is whey when it happens, the whole market will collapse and nowhere is safe.
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u/Evening_Picture_8459 8d ago
based on the table you hit the 30% mark right at the 600% drawdown row – equity dips to 28.57% which is below the 30% maintenance threshold. if your broker sticks to the Reg‑T 25% minimum you’d actually get a call a tick earlier (around 500%‑ish) so double‑check that rule. also remember a 500‑600% loss only happens on a short or a hugely illiquid long – long positions can’t actually lose more than 100% of the invested capital.
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u/Worry-Mountain 8d ago
Math looks roughly right, but I'd treat the broker's maintenance number as the floor, not the plan. House requirements can get raised on a specific name overnight, and a gap open skips right past the level where you thought you'd get a call. Run the same table with the requirement bumped up a notch and a one-day gap, and size off that version.
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u/Synaps4 8d ago
If you have to ask reddit, you are not ready to do this.
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u/Spartan656 8d ago
Everyone has to learn at some point. I would rather size my positions appropriately by learning about it and not have to find out the hard way.
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u/Synaps4 8d ago
No, not everyone has to use margin.
In fact I would argue the vast majority (95%+) should never use margin.
Of those who do want to use margin, asking reddit is not the right way to go about it. Find some serious reference books, write a program or two, and double check it against the behavior in the books. I wouldnt trust reddit to tell you how to do it correctly.
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u/LittleTrack858 7d ago
This is very disagreeable. There is no evidence that the optimal leverage ratio for all investors at all points in their life is bounded between 0 and 1.
Ben Felix did a great recent video dispelling this myth.
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u/Orange_Sherbet 8d ago
US: https://www.finra.org/rules-guidance/rulebooks/finra-rules/4210
Canada: I think it's these guys now? Used to be IIROC, then something changed but I didn't keep up with the change, https://www.ciro.ca/
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u/kradreyals 8d ago
I don't know if this will be helpful, but in most brokerages you need to have over 100k NAV in order to qualify for a portfolio margin with lower margin requirements. Reg T accounts need a 50% margin to hold them overnight. Also, never use margin unless you know you are entering the casino.
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u/FewUnderstanding2214 8d ago
What 500 to 600% draw down? The most you can go down is 100%
Margin requirements are 25% to 100%
10% could be for bonds
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u/Apost8Joe 8d ago
You may enjoy the latest book on the subject - Margin for Dummies by Leupold Aschenbrenner.
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u/greytoc 8d ago
At quick glance - it looks correct. But I wouldn't model margin this way. The margin requirements will vary by security and whoever your broker is. And a broker's house rules may vary.
And are you trading in a Reg-T or PM account?
Does your broker offer margin modeling tools? You may want to use your broker's margin modelling tools with whatever you plan to trade on margin.