Trade on margin
When you trade on margin, you borrow a portion of the funds you use to buy stocks so that you can try to take advantage of opportunities in the market. You pay interest on the funds you borrow until you repay the loan. For each trade you make in your margin account, we use all available cash and sweep funds first, then charge you -- until the loan is repaid -- the current margin interest rate on the balance of the funds required to fill the order.
The minimum balance required for a margin account is $2,000.
Note:
Trading on margin involves risk. Penny stock, bulletin board, and pink sheets cannot be traded on margin. Before using margin, determine whether this type of trading strategy is right for you given your specific investment objectives, experience, risk tolerance, and financial situation. To get a better understanding of the risks involved, please see the FINRA margin disclosure statement.
E*TRADE may change margin requirements at any time without prior notice and call for additional Collateral, including without limitation on an intraday basis.
Before you begin
Understand how my account changes when I add margin capabilities
When you begin trading on margin, you'll notice some changes in your account balances and the way they're displayed. These changes are made to show more specific details about your account, and provide you with important facts you'll need to know as you monitor your account and investments.
For instance, some of your holdings will now show on the Positions page with an 'M' or 'Margin.' This does not mean you've bought them on margin. Rather, this is done to show that the position is marginable; that is to say, it has loan value and therefore contributes to your purchasing power.
You'll also now see rows on the Balances page showing your purchasing power and cash or option purchasing power.
Sometimes, you might notice that your account is showing a margin debit, even though you have more than enough cash in the account to cover a particular trade. This can happen between the trade date and settlement, and does not mean you're being charged margin interest. You can find out more about these kinds of short-term debits elsewhere in the margin section.
View the FINRA margin disclosure statement
Please read the FINRA margin disclosure statement, presented below, before making a trade on margin.
The following is the text of the FINRA margin disclosure statement:
Your brokerage firm is furnishing this document to you to provide some basic facts about purchasing securities on margin, and to alert you to the risks involved with trading securities in a margin account. Before trading stocks in a margin account, you should carefully review the margin agreement provided by your firm. Consult your firm regarding any questions or concerns you may have with your margin accounts.
When you purchase securities, you may pay for the securities in full or you may borrow part of the purchase price from your brokerage firm. If you choose to borrow funds from your firm, you will open a margin account with the firm. The securities purchased are the firm's collateral for the loan to you. If the securities in your account decline in value, so does the value of the collateral supporting your loan, and, as a result, the firm can take action, such as issue a margin call and/or sell securities in your account, in order to maintain the required equity in the account.
It is important that you fully understand the risks involved in trading securities on margin. These risks include the following:
You can lose more funds than you deposit in the margin account. A decline in the value of securities that are purchased on margin may require you to provide additional funds to the firm that has made the loan to avoid the forced sale of those securities or other securities in your account(s).
The firm can force the sale of securities in your account. If the equity in your account falls below the maintenance margin requirements, or the firm's higher "house" requirements, the firm can sell the securities in any of your account(s) to cover the margin deficiency. You also will be responsible for any shortfall in the account after such a sale.
The firm can sell your securities without contacting you. Some investors mistakenly believe that a firm must contact them for a margin call to be valid and that the firm cannot liquidate securities in their accounts to meet the call unless the firm has contacted them first. This is not the case. Most firms will attempt to notify their customers of margin calls, but they are not required to do so. However, even if a firm has contacted a customer and provided a specific date by which the customer can meet a margin call, the firm can still take necessary steps to protect its financial interests, including immediately selling the securities without notice to the customer.
You are not entitled to choose which security in your account(s) are liquidated or sold to meet a margin call. Because the securities are collateral for the margin loan, the firm has the right to decide which security to sell in order to protect its interests.
The firm can increase its "house" maintenance margin requirements at any time and is not required to provide you with advance written notice. These changes in firm policy often take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause the member to liquidate or sell securities in your account(s).
You are not entitled to an extension of time on a margin call. While an extension of time to meet margin requirements may be available to customers under certain conditions, a customer does not have a right to the extension.
Borrowing on margin isn't for everyone. Before using margin, determine whether this type of trading strategy is right for you given your specific investment objectives, experience, risk tolerance, and financial situation.
Place a trade on margin
Once your account is approved for margin trading, you don't need to place any special orders or give us any special instructions to place a trade on margin. Just follow the steps you would to place the same trade in a cash account. (To place a stock trade on margin, see Place a stock order for step-by-step instructions.)
If you have $2,000 cash in your account, and place an order to buy $3,000 of a marginable security, the $2,000 will be placed against the amount of the trade, and you'll effectively borrow the difference ($1,000) on margin.
When you place a buy order for marginable securities, the full amount of the trade ($3,000 in the above example) will initially show as a margin debit. Any and all funds in your account will be "swept" against the amount of this debit at the time the trade settles (for stocks, the first business day following the day of execution). We'll use all available cash and money market funds in your account before we'll begin charging you interest on any outstanding debit.
Conversely, any marginable securities you sell in your account will show initially as a margin credit until the trade settles.
Note:
Before placing a trade on margin, it's important to check your purchasing power as well as the margin maintenance requirements for the security you want to trade.
View and understand purchasing power and margin equity
Purchasing power for marginable securities is the maximum dollar value of fully-marginable securities you can purchase and still satisfy the initial and maintenance margin requirements in your account. Any portion of this amount above and beyond your cash and sweep option balance will be borrowed "on margin" and will incur margin interest charges.
Purchasing power for non-marginable securities and options represents something different. This is the dollar value of non-marginable securities (such as penny stocks or options) you could purchase using cash plus the loan value of marginable securities in your account. Again, any part of this amount in excess of your account's cash and sweep option balance will be on margin, and incur margin interest charges. Cash or option purchasing power is also the maximum amount you can withdraw using margin, but withdrawals may also be subject to holds for clearing of recent deposits and settlement of trade proceeds.
Equity is the value of securities in your account, plus your cash credit balances, minus your margin loan (debit). If you had $10,000 in your account, and bought $20,000 in securities, the $10,000 would represent your equity. Margin equity is specifically defined by industry regulations, and does not include the value of options and other non-marginable securities. Watch your margin equity carefully. If it goes too low, you could find yourself getting a margin call.
View and understand SMA
Special Memorandum Account
A companion to your margin account, a Special Memorandum Account (SMA) works like a bookkeeping entry to record the excess equity above your portfolio's Regulation T initial requirement—usually 50%, as defined by the Federal Reserve Board. It reflects the historical "high-water mark" of the excess equity in your account, adjusted for debits and credits from past transactions.
The primary purpose of the SMA is to preserve your buying power against future declines in market value. SMA is used (reduced) only when you open new positions or make cash withdrawals. If your SMA balance turns negative, a Fed call will be issued on your margin account to cover the deficit.
The following table illustrates the effect on SMA of some of the most common types of transactions and events.
How Market Movement Can Impact SMA
As shown in the above table, your SMA balance may increase if your portfolio appreciates and your new Reg T excess equity (equity above the 50% initial requirement) is greater than you existing SMA balance.
For example, if you have a portfolio of $20,000 and a margin debit balance of $10,000, your margin equity would be $10,000 (your security holdings minus margin loans outstanding), which in this case would be equal to the Reg T initial requirement of 50%.
If your holdings appreciated in value to $22,000, your margin equity would increase to $12,000—and the new Reg T initial requirement to $11,000. At this point, your Reg T excess equity would be $1,000. Overnight, if your current SMA balance had been less than $1,000, your SMA would be credited such that the new balance would equal $1,000 (i.e. the new "high-water mark"). This SMA balance would stay the same until your account appreciated further above the Reg T initial requirement, or transactions were made, as described in the table above, that increased or reduced your SMA.
View and understand margin maintenance requirements
You can trade many different types of securities in your margin account. Different securities positions have varying margin maintenance requirements.
Find out more...
View securities with special maintenance requirements and short positions
Sometimes we set higher minimum maintenance requirements for certain securities.
Find out more...
Trade if my account is on a 90-day restriction
When an account is placed on a 90-day restriction, it means you must have full settled funds in your account prior to placing your trade.
Find out more...
Understand margin requirements for pattern day traders
If you are classified as a pattern day trader under the FINRA Rule 4210, it can affect you in a number of ways.
Find out more...
Understand option trading strategies available with margin accounts
A wider range of options trading strategies is available with a margin account, but you may have to qualify for a higher option approval level.
Find out more...
Pay off my debit balance
You'll be charged interest daily on any outstanding debit balance in your account. To reduce or pay off your debit balance, you'll have to deposit additional funds into your account or sell securities in your account. We'll automatically use the proceeds to pay off the margin debit.
Note:
The proceeds of any trade will automatically be placed against any outstanding debit in your account once the trade is settled and before the proceeds are moved into a cash or sweep account.
Understand why my margin account shows a debit
This is a common question from our margin customers. It's easy to think there's some sort of problem when you first notice an unexpected margin debit in your account.
Suppose you have $5,000 in cash, and one day you make a trade for $2,200. The next day you check your balances, and you find that you have a margin debit showing in your account for $2,200, with $5,000 still sitting in cash. What gives?
What happened in this instance is the trade hasn't yet settled. Stock trades settle on the second business day after the day of execution. This means that if you place a trade on a Thursday, it will not settle until Monday. The amount of the trade will show as a margin debit until the trade settles, at which time funds will be drawn from your cash and/or sweep account.
Note:
If you have enough funds available to cover the trade at settlement, you will not be charged margin interest.
Why is this being done? Since the money isn't taken until the settlement date, it stays in your account until the last possible moment. This way, it can earn interest for you for as long as possible.
In fact, if you sell stocks in a margin account, the proceeds will show as a margin credit until settlement. You'll then see the credit move back to cash or your money market in a similar fashion.
Meet a margin maintenance or Fed call
If your account enters into a call situation, we may take action in your account with or without notice to you. This action may involve selling securities in your account to meet the call, or closing short positions. E*TRADE Securities may sell any and all securities in your account at our discretion in these situations.
As such, you should monitor your account balances and positions very closely and make sure you react quickly when your account is in a call to bring your equity position up to the minimums.
There are two types of margin calls that you may receive. You'll receive a Fed call (also known as Federal or Regulation T call) when your account equity falls below the Federal Reserve Board's 50% margin requirement when making an initial purchase. The order validation logic in our systems rejects most orders that would result in Fed calls, but occasionally they do occur due to intraday price fluctuations or transactions unknown to the system. You will receive a maintenance margin, or "house" call, when your margin equity falls below the margin maintenance requirements of your holdings, usually because of changes in market prices.
If you receive a margin maintenance or Fed call, we'll send a SmartAlert message letting you know. Please be aware, however, that you are responsible for monitoring your own account status.
For information on meeting a margin call in a Portfolio Margin Account, please click here.
There are two basic ways to meet a maintenance margin or Fed call:
Understand margin calls for pattern day traders
If you are classified as a pattern day trader under the FINRA Rule 4210, it can affect you in a number of ways.
Find out more...
Understand and calculate margin interest
When you place trades in your margin account that exceed your cash and sweep holdings, you'll incur a margin debit and will be subject to interest charges beginning on the settlement date (for stocks, the second business day following the day of execution). As an example, if you place a stock trade on margin on a Monday, margin interest will not begin to accrue until settlement on Wednesday.
Margin Calls Due to Option Assignment
This may be one of the most confusing types of margin calls since it isn't based on market movement or increased house requirements imposed by your trading firm. The increased requirement stems from option assignment, especially early assignment, and it typically affects spread traders, and highlights the fact that risk does not always equal requirement.
What Is Early Assignment?
Most index options settle "European style", meaning that they can only be exercised on expiration day. By contrast, most equity options settle "American style", meaning that they can be exercised at any time., If you are short an American-style option, there is always a chance that the counterparty to your short option position could elect to exercise the long option. You, as the holder of the short option would then be assigned.
If you initially held a short call position, upon early assignment, that position would be replaced by a short stock position totaling 100 shares of short stock for every short call option contract held. On the other hand, if you held a short put position, then upon early assignment, that position would be replaced by long stock totaling 100 shares for every short put option contract you originally held.
The effect of early assignment can lead to more complexity if you are an option spread trader since only part of a spread position is subject to early assignment. Although the risk in the new position is similar to the risk in the old position, you may experience a drastic change in requirements and a correspondingly large margin call.
Use Case: Short Put Spread leading to early assignment of your short put position
As an example, consider a short put spread. This is a trade consisting of a long put option at one strike and a short put option at another. If you are assigned on the short put position, that position is converted to long stock. As a result, the new position is no longer a put spread. Instead, it consists of one long put option contract and 100 shares of long stock, often referred to as a married put.
Let's say that XYZ stock is trading at $50 per share and you sell 10 contracts of the 50/45 put spread for $2. This means that you are:
Your worst-case scenario would arise if the stock settled below $45 per share. Then, both put options would expire in the money. Per your short 50-strike puts, you'd be obligated to buy 1,000 shares of XYZ for $50. However, your loss would be capped since your long 45-strike puts would allow you to sell 1,000 shares of XYZ stock at $45. Then, you'd be out $5, or $5,000 on your 10 put spreads.
That $5,000 equates to the amount that your trading firm would ask you to set aside as your requirement in order to allow you to place this trade.
Suppose the stock drops to $30 per share. The stock price is now at a level where you've attained maximum loss…not a good day. To complicate matters, you are subsequently assigned on your short 50-strike puts. Your new position is:
Remember your original requirement of $5,000? Well, now that you're long 1,000 shares of XYZ at $50, your total requirement will increase by 50% of the stock value, or $25,000. Indeed, your margin requirement has changed considerably and if you're new to this dynamic, it may take you by surprise.
While you've lost money and your platform has informed you that you are in a $25,000 margin call, chances are you haven't lost more than the $5,000 that you deposited as margin requirement when you initially placed the trade.
The reason is that the risk in this new position is nearly identical to that of the original put spread. Hence, the original margin requirement is typically sufficient to cover the risk of either the put spread or the new resulting married put position. Thus, you likely do not have to deposit $25,000 to meet your margin call…instead, there are other things you can do to address your call:
Important note: Options transactions are intended for sophisticated investors are complex, carry a high degree of risk, and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options before you begin trading options.
Above use case does not reflect transaction fees. Because of the importance of tax considerations to all options transactions, the investor considering options should consult their tax adviser as to how taxes affect the outcome of each options strategy. Commissions and other costs may be a significant factor. An options investor may lose the entire amount of their investment in a relatively short period of time. Supporting documentation for any claims will be supplied upon request.
Also, there are specific risks associated with covered call writing, including the risk that the underlying stock could be sold at the exercise price when the current market value is greater than the exercise price the call writer will receive. A covered call writer forgoes participation in any increase in the stock price above the call exercise price and continues to bear the downside risk of stock ownership if the stock price decreases more than the premium received.
Moreover, there are specific risks associated with buying options, including the risk that the purchased options could expire worthless. Also, the specific risks associated with selling cash-secured puts include the risk that the underlying stock could be purchased at the exercise price when the current market value is less than the exercise price the put seller will receive.
Furthermore, there are specific risks associated with trading spreads, including substantial commissions, because it involves at least twice the number of contracts as a long or short position and because spreads are almost invariably closed out prior to expiration. Multi-leg options including collar strategies involve multiple commission charges.
How margin interest applies to short positions is somewhat more complicated and is explained below.
Margin interest charges are based on the size of the debit in your account. They're compounded daily, and charged monthly. You'll see them reflected in your statement and online balances and transactions. Please view our margin interest rates for all customer accounts.
Understand how margin works for short positions
Whenever you make a short sale, you have to have enough funds (cash and/or purchasing power) to be able to buy the shares back at any time, no matter what the stock price is.
If you sell shares short, and they move against you (rise in price), you'll see funds moved from the cash and sweep section of your account into margin. Your margin balance will show an amount equal to what you'd need to have in order to buy back the shares.
If short shares continue to rise in price, and you don't have enough cash or sweep balance in your account to cover the position (buy back the shares), you'll begin to borrow on margin for this purpose. At that time, you'll also begin to accrue margin interest charges. These will be computed and charged the same as for a regular margin debit.
Remove margin trading from my account
You can remove margin trading from your account in one of the following ways:
Note:
Before you can remove margin trading from your account, your debit balance must be paid in full and the Balances page must show a $0 margin debit balance. All short positions must be closed and all sales must be settled prior to removing margin trading. After you remove this account feature, you'll be able to place trades using only the available cash in your account.
What is Portfolio Margin
Portfolio Margin is a way of calculating margin maintenance requirements based on the overall risk of a group of related instruments. This differs from a strategy-based (traditional) margin account where requirements are applied to individual positions or to specific pre-defined options strategies (e.g. Spreads, Covered Calls/Puts, Straddles, etc.).
Typically, portfolio margin treatment provides greater leverage than strategy-based treatment for a portfolio of hedged positions. This means that investors who manage position risk by hedging positions with related securities will be able to invest in more market share with less capital commitment than required in a strategy-based margin account.
The increased leverage that portfolio margin allows does have the potential of increasing the risk in an account. For this reason, suitability and qualification requirements for opening a portfolio margin account are more stringent.
For convenience, E*TRADE displays positions in a Portfolio Margin account grouped into four high-level categories, referred to as Portfolio Types (described below). For the purposes of calculating margin requirements in a Portfolio Margin account, positions in these accounts are further grouped together into various Position Groups based on how the securities are related to each other.
Portfolio Type
Positions in a portfolio margin account are displayed in categories, called Portfolio Types, based on their eligibility for portfolio margin treatment and the type of underlying security/index. The Portfolio Type categories that positions will be allocated to are:
Position Groups
Positions in a portfolio margin account are further grouped together at different levels based on the market correlations between the positions. The three levels of position groups are Product Class, Product Group, and Portfolio Group. Each of these groups provides an additional layer of profit/loss offsets between positions.
Quick note regarding Portfolio Margin Ineligible securities
As mentioned above, some securities are not eligible for Portfolio Margin treatment. This means that, while these positions can be traded and held in a Portfolio Margin account, the margin maintenance requirements calculated for those positions will be the same as if they were held in a strategy-based (traditional) margin account. When previewing a new order, a notice will be shown in the order preview window indicating whether or not the security to be traded is eligible for Portfolio Margin treatment.
How are Portfolio Margin Requirements Calculated
Portfolio Margin maintenance requirements are calculated by "stressing" a group of related positions, and determining the maximum loss that the group of positions would incur over a range of market movements.
Portfolio Margin Purchasing Power and Margin Equity
The purchasing power in a Portfolio Margin account is displayed in a different format that in a strategy-based (traditional) margin account. In Portfolio Margin accounts, purchasing power is displayed in terms of Excess Equity.
Margin Equity - In Portfolio Margin accounts, all assets in the account contribute towards Margin Equity. Therefore, in a Portfolio Margin account, Margin Equity is always equal to Net Account Value. This value will always be displayed using real-time values for the positions held in the account.
Total Margin Requirements - Total Margin Requirements in a Portfolio Margin account include the total margin maintenance requirements for both Portfolio Margin Eligible and Ineligible securities. This is the amount of equity that must be maintained in the account at all times to avoid a House Call situation.
Excess Equity - Excess Equity is the amount of Margin Equity in the account in excess of the Total Margin Requirements. In other words:
Excess Equity = Margin Equity - Total Margin Requirements
Excess Equity will be reduced or increased dollar-for-dollar for any increase or decrease in Total Margin Requirements, as a result of trading or periodic restressing of the positions in the account. Excess Equity must remain positive in order to avoid being issued a House Call.
Available Excess Equity - Available Excess Equity is the amount of Excess Equity that can be applied to new orders that increase margin maintenance requirements. Available Excess Equity is reduced for requirements reserved for existing open orders, as well as Funds Withheld from Purchasing Power for recent deposits. In other words,
Available Excess Equity = Excess Equity - Open Order Reserve - Funds on Hold
When previewing a new order, a Purchasing Power section will be displayed on the Order Preview window, which will indicate if the new order will reduce Available Excess Equity, and by how much. This is a valuable tool to understand the impact of new orders on Purchasing Power and for managing overall margin leverage in a Portfolio Margin account.
How to meet a Portfolio Margin House Call
Due to the increased leverage typically provided by a Portfolio Margin account, the amount of time given to resolve a call situation in a Portfolio Margin account is generally shorter than the amount of time given in a strategy-based (traditional) margin account.
If your account enters into a call situation, we may take action in your account with or without notice to you. This action may involve selling securities in your account to meet the call, or closing short positions. E*TRADE Securities may sell any and all securities in your account at our discretion in these situations.
As such, you should monitor your account balances and positions very closely and make sure you react quickly when your account is in a call to bring your equity position up to the minimums.
When a Portfolio Margin account enters into a call situation, the account will be limited to accepting only orders which reduce margin maintenance requirements, thereby reducing the amount of the call.
A Portfolio Margin account could enter into a call situation either by a reduction in account equity due to market fluctuation, or an increase in margin maintenance requirements due to market fluctuation, trade execution, manual increase by the Margin Department, or any combination of these. The order validation logic in our systems rejects most orders that would result in house calls, but occasionally they do occur due to intraday price fluctuations or transactions unknown to the system.
If you receive a Portfolio Margin house call, we'll send a SmartAlert message letting you know. Please be aware, however, that you are responsible for monitoring your own account status.
There are two basic ways to meet a Portfolio Margin call:
How to meet a Portfolio Margin Minimum Equity Call
Under FINRA and NYSE rules, a Portfolio Margin account at E*TRADE must maintain a minimum of $100,000 in equity at all times. If the equity in a Portfolio Margin account falls below $100,000, the account will be limited to accepting only orders which reduce margin maintenance requirements. This restriction will continue until the equity rises above $100,000.
If you receive a Portfolio Margin minimum equity call, we'll send a SmartAlert message letting you know. Please be aware, however, that you are responsible for monitoring your own account status.
If the minimum equity call situation persists for an extended period of time, the Margin Department may, at its own discretion, require that the Portfolio Margin account assets be moved to a strategy-based (traditional) margin account.
You can satisfy a Portfolio Margin minimum equity call in one or more of the following ways:
Portfolio Margin interest rates
Portfolio Margin accounts are subject to the same margin interest rates as a strategy-based (traditional) margin account.
Find out more...
View margin interest rates
See our current standard margin interest rates.
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View Pro Elite margin interest rates
See our current margin rates for Pro Elite accounts.
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The minimum balance required for a margin account is $2,000.
Note:
Trading on margin involves risk. Penny stock, bulletin board, and pink sheets cannot be traded on margin. Before using margin, determine whether this type of trading strategy is right for you given your specific investment objectives, experience, risk tolerance, and financial situation. To get a better understanding of the risks involved, please see the FINRA margin disclosure statement.
E*TRADE may change margin requirements at any time without prior notice and call for additional Collateral, including without limitation on an intraday basis.
Before you begin
- Open a margin account
- Add margin capabilities to my existing account
- Understand how my account changes when I add margin capabilities
- View the FINRA margin disclosure statement
- Place a trade on margin
- View and understand purchasing power and margin equity
- View and understand SMA
- View and understand margin maintenance requirements
- View margin maintenance requirement
- Trade if my account is on a 90-day restriction
- Understand margin requirements for pattern day traders
- View ETFs with special Long and Short margin requirements
- Understand option trading strategies available with margin accounts
- Pay off my debit balance
- Understand why my margin account shows a debit
- Meet a margin maintenance or Fed call
- Understand margin calls for pattern day traders
- Understand and calculate margin interest
- Margin Calls Due to Option Assignment
- Understand how margin works for short positions
- Remove margin trading from my account
- What is Portfolio Margin
- How are Portfolio Margin Requirements Calculated
- Portfolio Margin Purchasing Power and Account Equity
- How to meet a Portfolio Margin House Call
- How to meet a Portfolio Margin Minimum Equity Call
- Portfolio Margin interest rates
Understand how my account changes when I add margin capabilities
When you begin trading on margin, you'll notice some changes in your account balances and the way they're displayed. These changes are made to show more specific details about your account, and provide you with important facts you'll need to know as you monitor your account and investments.
For instance, some of your holdings will now show on the Positions page with an 'M' or 'Margin.' This does not mean you've bought them on margin. Rather, this is done to show that the position is marginable; that is to say, it has loan value and therefore contributes to your purchasing power.
You'll also now see rows on the Balances page showing your purchasing power and cash or option purchasing power.
Sometimes, you might notice that your account is showing a margin debit, even though you have more than enough cash in the account to cover a particular trade. This can happen between the trade date and settlement, and does not mean you're being charged margin interest. You can find out more about these kinds of short-term debits elsewhere in the margin section.
View the FINRA margin disclosure statement
Please read the FINRA margin disclosure statement, presented below, before making a trade on margin.
The following is the text of the FINRA margin disclosure statement:
Your brokerage firm is furnishing this document to you to provide some basic facts about purchasing securities on margin, and to alert you to the risks involved with trading securities in a margin account. Before trading stocks in a margin account, you should carefully review the margin agreement provided by your firm. Consult your firm regarding any questions or concerns you may have with your margin accounts.
When you purchase securities, you may pay for the securities in full or you may borrow part of the purchase price from your brokerage firm. If you choose to borrow funds from your firm, you will open a margin account with the firm. The securities purchased are the firm's collateral for the loan to you. If the securities in your account decline in value, so does the value of the collateral supporting your loan, and, as a result, the firm can take action, such as issue a margin call and/or sell securities in your account, in order to maintain the required equity in the account.
It is important that you fully understand the risks involved in trading securities on margin. These risks include the following:
You can lose more funds than you deposit in the margin account. A decline in the value of securities that are purchased on margin may require you to provide additional funds to the firm that has made the loan to avoid the forced sale of those securities or other securities in your account(s).
The firm can force the sale of securities in your account. If the equity in your account falls below the maintenance margin requirements, or the firm's higher "house" requirements, the firm can sell the securities in any of your account(s) to cover the margin deficiency. You also will be responsible for any shortfall in the account after such a sale.
The firm can sell your securities without contacting you. Some investors mistakenly believe that a firm must contact them for a margin call to be valid and that the firm cannot liquidate securities in their accounts to meet the call unless the firm has contacted them first. This is not the case. Most firms will attempt to notify their customers of margin calls, but they are not required to do so. However, even if a firm has contacted a customer and provided a specific date by which the customer can meet a margin call, the firm can still take necessary steps to protect its financial interests, including immediately selling the securities without notice to the customer.
You are not entitled to choose which security in your account(s) are liquidated or sold to meet a margin call. Because the securities are collateral for the margin loan, the firm has the right to decide which security to sell in order to protect its interests.
The firm can increase its "house" maintenance margin requirements at any time and is not required to provide you with advance written notice. These changes in firm policy often take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause the member to liquidate or sell securities in your account(s).
You are not entitled to an extension of time on a margin call. While an extension of time to meet margin requirements may be available to customers under certain conditions, a customer does not have a right to the extension.
Borrowing on margin isn't for everyone. Before using margin, determine whether this type of trading strategy is right for you given your specific investment objectives, experience, risk tolerance, and financial situation.
Place a trade on margin
Once your account is approved for margin trading, you don't need to place any special orders or give us any special instructions to place a trade on margin. Just follow the steps you would to place the same trade in a cash account. (To place a stock trade on margin, see Place a stock order for step-by-step instructions.)
If you have $2,000 cash in your account, and place an order to buy $3,000 of a marginable security, the $2,000 will be placed against the amount of the trade, and you'll effectively borrow the difference ($1,000) on margin.
When you place a buy order for marginable securities, the full amount of the trade ($3,000 in the above example) will initially show as a margin debit. Any and all funds in your account will be "swept" against the amount of this debit at the time the trade settles (for stocks, the first business day following the day of execution). We'll use all available cash and money market funds in your account before we'll begin charging you interest on any outstanding debit.
Conversely, any marginable securities you sell in your account will show initially as a margin credit until the trade settles.
Note:
Before placing a trade on margin, it's important to check your purchasing power as well as the margin maintenance requirements for the security you want to trade.
View and understand purchasing power and margin equity
Purchasing power for marginable securities is the maximum dollar value of fully-marginable securities you can purchase and still satisfy the initial and maintenance margin requirements in your account. Any portion of this amount above and beyond your cash and sweep option balance will be borrowed "on margin" and will incur margin interest charges.
Purchasing power for non-marginable securities and options represents something different. This is the dollar value of non-marginable securities (such as penny stocks or options) you could purchase using cash plus the loan value of marginable securities in your account. Again, any part of this amount in excess of your account's cash and sweep option balance will be on margin, and incur margin interest charges. Cash or option purchasing power is also the maximum amount you can withdraw using margin, but withdrawals may also be subject to holds for clearing of recent deposits and settlement of trade proceeds.
Equity is the value of securities in your account, plus your cash credit balances, minus your margin loan (debit). If you had $10,000 in your account, and bought $20,000 in securities, the $10,000 would represent your equity. Margin equity is specifically defined by industry regulations, and does not include the value of options and other non-marginable securities. Watch your margin equity carefully. If it goes too low, you could find yourself getting a margin call.
View and understand SMA
Special Memorandum Account
A companion to your margin account, a Special Memorandum Account (SMA) works like a bookkeeping entry to record the excess equity above your portfolio's Regulation T initial requirement—usually 50%, as defined by the Federal Reserve Board. It reflects the historical "high-water mark" of the excess equity in your account, adjusted for debits and credits from past transactions.
The primary purpose of the SMA is to preserve your buying power against future declines in market value. SMA is used (reduced) only when you open new positions or make cash withdrawals. If your SMA balance turns negative, a Fed call will be issued on your margin account to cover the deficit.
The following table illustrates the effect on SMA of some of the most common types of transactions and events.
| Type of Transaction | Your SMA Will Be: | |
|---|---|---|
| SMA Debits (Reductions) |
Cash withdrawals | Reduced at a 1:1 ratio |
| Opening transactions on marginable securities | Reduced by 50% of the trade amount | |
| Opening transactions on options and non-marginable securities | Reduced by 100% of the trade amount | |
| An increase in options requirement held in your account | Reduced by the amount of the requirement increase | |
| SMA Credits (Increases) |
Cleared cash deposits, including dividend and interest payments | Increased at a 1:1 ratio |
| Closing transactions on marginable securities | Increased by 50% of the trade amount | |
| Closing transactions on options and non-marginable securities | Increased by 100% of the trade amount | |
| A decrease in options requirement held in your account | Increased in accordance with the lower requirement level | |
| Market movement that increases your margin equity at a level above your portfolio's Reg T initial requirement (if the new excess equity is greater than your existing SMA balance) | Increased based on the appreciation of your portfolio relative to your SMA balance. See below for example. |
How Market Movement Can Impact SMA
As shown in the above table, your SMA balance may increase if your portfolio appreciates and your new Reg T excess equity (equity above the 50% initial requirement) is greater than you existing SMA balance.
For example, if you have a portfolio of $20,000 and a margin debit balance of $10,000, your margin equity would be $10,000 (your security holdings minus margin loans outstanding), which in this case would be equal to the Reg T initial requirement of 50%.
If your holdings appreciated in value to $22,000, your margin equity would increase to $12,000—and the new Reg T initial requirement to $11,000. At this point, your Reg T excess equity would be $1,000. Overnight, if your current SMA balance had been less than $1,000, your SMA would be credited such that the new balance would equal $1,000 (i.e. the new "high-water mark"). This SMA balance would stay the same until your account appreciated further above the Reg T initial requirement, or transactions were made, as described in the table above, that increased or reduced your SMA.
View and understand margin maintenance requirements
You can trade many different types of securities in your margin account. Different securities positions have varying margin maintenance requirements.
Find out more...
View securities with special maintenance requirements and short positions
Sometimes we set higher minimum maintenance requirements for certain securities.
Find out more...
Trade if my account is on a 90-day restriction
When an account is placed on a 90-day restriction, it means you must have full settled funds in your account prior to placing your trade.
Find out more...
Understand margin requirements for pattern day traders
If you are classified as a pattern day trader under the FINRA Rule 4210, it can affect you in a number of ways.
Find out more...
Understand option trading strategies available with margin accounts
A wider range of options trading strategies is available with a margin account, but you may have to qualify for a higher option approval level.
Find out more...
Pay off my debit balance
You'll be charged interest daily on any outstanding debit balance in your account. To reduce or pay off your debit balance, you'll have to deposit additional funds into your account or sell securities in your account. We'll automatically use the proceeds to pay off the margin debit.
Note:
The proceeds of any trade will automatically be placed against any outstanding debit in your account once the trade is settled and before the proceeds are moved into a cash or sweep account.
Understand why my margin account shows a debit
This is a common question from our margin customers. It's easy to think there's some sort of problem when you first notice an unexpected margin debit in your account.
Suppose you have $5,000 in cash, and one day you make a trade for $2,200. The next day you check your balances, and you find that you have a margin debit showing in your account for $2,200, with $5,000 still sitting in cash. What gives?
What happened in this instance is the trade hasn't yet settled. Stock trades settle on the second business day after the day of execution. This means that if you place a trade on a Thursday, it will not settle until Monday. The amount of the trade will show as a margin debit until the trade settles, at which time funds will be drawn from your cash and/or sweep account.
Note:
If you have enough funds available to cover the trade at settlement, you will not be charged margin interest.
Why is this being done? Since the money isn't taken until the settlement date, it stays in your account until the last possible moment. This way, it can earn interest for you for as long as possible.
In fact, if you sell stocks in a margin account, the proceeds will show as a margin credit until settlement. You'll then see the credit move back to cash or your money market in a similar fashion.
Meet a margin maintenance or Fed call
If your account enters into a call situation, we may take action in your account with or without notice to you. This action may involve selling securities in your account to meet the call, or closing short positions. E*TRADE Securities may sell any and all securities in your account at our discretion in these situations.
As such, you should monitor your account balances and positions very closely and make sure you react quickly when your account is in a call to bring your equity position up to the minimums.
There are two types of margin calls that you may receive. You'll receive a Fed call (also known as Federal or Regulation T call) when your account equity falls below the Federal Reserve Board's 50% margin requirement when making an initial purchase. The order validation logic in our systems rejects most orders that would result in Fed calls, but occasionally they do occur due to intraday price fluctuations or transactions unknown to the system. You will receive a maintenance margin, or "house" call, when your margin equity falls below the margin maintenance requirements of your holdings, usually because of changes in market prices.
If you receive a margin maintenance or Fed call, we'll send a SmartAlert message letting you know. Please be aware, however, that you are responsible for monitoring your own account status.
For information on meeting a margin call in a Portfolio Margin Account, please click here.
There are two basic ways to meet a maintenance margin or Fed call:
- Deposit additional funds.
Our preference, when your account is in margin call, is that you send in sufficient funds to meet the call.
Our general recommendation in these instances is that you either wire the funds or send them via overnight courier (such as FedEx or UPS). Should you choose this overnight option, call us at 1-800-ETRADE-1 and pass along the tracking information -- and we'll note this in your account. At this time, using the Transfer Money service to deposit funds is not an acceptable way to meet a margin call.
If your equity continues to drop after you've met the call, in most cases, you'll receive an additional call. Please be aware that we may take action in your account without notice. - Liquidate securities.
If you're unable to deposit the required funds or do not wish to, you may liquidate enough shares in your account to bring the equity back to the minimum requirement. For Fed calls, if you incur four liquidation violations in a rolling 12 month period, a 90-day trading restriction may be placed on your account. (see additional notes below)
Selling securities to meet a call does not guarantee we will not take action in your account. If you do not sell enough securities to meet the call, or if your equity continues to decline, we may either issue another call or take action in your account at our discretion -- without further notice.
Should you choose to liquidate marginable securities, you will only realize a percentage of the proceeds in cash that will apply against the call. For example, if you sell a stock that has a 50% margin requirement, you'd need to sell double the amount of the call in order to meet it. If you sell a stock with a 30% requirement, you might need to sell three times the amount due. These are approximate numbers; you should contact us with any questions and check your account balances when placing these trades.
If you decide to liquidate cash securities, you must sell enough securities to generate the cash required to meet the call.
- You are responsible for any losses incurred when securities in your account are automatically liquidated.
- If your equity continues to drop, you may receive an additional call. If the drop is severe, your securities may be sold without prior notice. You are not entitled to choose which securities will be sold to meet the call.
- We apply your cash deposit against your debit balance, which includes interest charged on the amount you borrowed.
- House margin requirements can change without notice. In some instances, such changes could put you into an immediate call, which you would be required to satisfy.
- We are generally unable to extend the due date of Fed calls.
- After a Fed call is in effect for four days, we charge an extension fee to your account.
- You may not buy or sell securities in quick succession without submitting payment to E*TRADE Securities. This is called "free-riding" and violates Regulation T of the Federal Reserve Board. Free-riding could result in your account being restricted or closed.
- Meeting Fed Calls by liquidating securities may cause a liquidation violation to occur on the account. Whether a liquidation violation has occurred is determined by the Margin Department, in its discretion, in a manner consistent with applicable securities regulations.
Understand margin calls for pattern day traders
If you are classified as a pattern day trader under the FINRA Rule 4210, it can affect you in a number of ways.
Find out more...
Understand and calculate margin interest
When you place trades in your margin account that exceed your cash and sweep holdings, you'll incur a margin debit and will be subject to interest charges beginning on the settlement date (for stocks, the second business day following the day of execution). As an example, if you place a stock trade on margin on a Monday, margin interest will not begin to accrue until settlement on Wednesday.
Margin Calls Due to Option Assignment
This may be one of the most confusing types of margin calls since it isn't based on market movement or increased house requirements imposed by your trading firm. The increased requirement stems from option assignment, especially early assignment, and it typically affects spread traders, and highlights the fact that risk does not always equal requirement.
What Is Early Assignment?
Most index options settle "European style", meaning that they can only be exercised on expiration day. By contrast, most equity options settle "American style", meaning that they can be exercised at any time., If you are short an American-style option, there is always a chance that the counterparty to your short option position could elect to exercise the long option. You, as the holder of the short option would then be assigned.
If you initially held a short call position, upon early assignment, that position would be replaced by a short stock position totaling 100 shares of short stock for every short call option contract held. On the other hand, if you held a short put position, then upon early assignment, that position would be replaced by long stock totaling 100 shares for every short put option contract you originally held.
The effect of early assignment can lead to more complexity if you are an option spread trader since only part of a spread position is subject to early assignment. Although the risk in the new position is similar to the risk in the old position, you may experience a drastic change in requirements and a correspondingly large margin call.
Use Case: Short Put Spread leading to early assignment of your short put position
As an example, consider a short put spread. This is a trade consisting of a long put option at one strike and a short put option at another. If you are assigned on the short put position, that position is converted to long stock. As a result, the new position is no longer a put spread. Instead, it consists of one long put option contract and 100 shares of long stock, often referred to as a married put.
Let's say that XYZ stock is trading at $50 per share and you sell 10 contracts of the 50/45 put spread for $2. This means that you are:
- Short 10 contracts of the 50-strike put, and
- Long 10 contracts of the 45-strike put
Your worst-case scenario would arise if the stock settled below $45 per share. Then, both put options would expire in the money. Per your short 50-strike puts, you'd be obligated to buy 1,000 shares of XYZ for $50. However, your loss would be capped since your long 45-strike puts would allow you to sell 1,000 shares of XYZ stock at $45. Then, you'd be out $5, or $5,000 on your 10 put spreads.
That $5,000 equates to the amount that your trading firm would ask you to set aside as your requirement in order to allow you to place this trade.
Suppose the stock drops to $30 per share. The stock price is now at a level where you've attained maximum loss…not a good day. To complicate matters, you are subsequently assigned on your short 50-strike puts. Your new position is:
- Long 1,000 shares of XYZ stock purchased at $50 per share
- Long 10 contracts of the 45-strike put
Remember your original requirement of $5,000? Well, now that you're long 1,000 shares of XYZ at $50, your total requirement will increase by 50% of the stock value, or $25,000. Indeed, your margin requirement has changed considerably and if you're new to this dynamic, it may take you by surprise.
While you've lost money and your platform has informed you that you are in a $25,000 margin call, chances are you haven't lost more than the $5,000 that you deposited as margin requirement when you initially placed the trade.
The reason is that the risk in this new position is nearly identical to that of the original put spread. Hence, the original margin requirement is typically sufficient to cover the risk of either the put spread or the new resulting married put position. Thus, you likely do not have to deposit $25,000 to meet your margin call…instead, there are other things you can do to address your call:
- Exercise your long option — Exercising your 10 long contracts of the 45-strike put represents the simplest, most efficient way to address your margin call.
- Liquidate the position — action is preferably executed as a package. For this example, you'd place a trade in which you'd simultaneously (in the same trade ticket) sell 1,000 shares of XYZ stock and sell 10 of the 45-strike put option contracts.
Important note: Options transactions are intended for sophisticated investors are complex, carry a high degree of risk, and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options before you begin trading options.
Above use case does not reflect transaction fees. Because of the importance of tax considerations to all options transactions, the investor considering options should consult their tax adviser as to how taxes affect the outcome of each options strategy. Commissions and other costs may be a significant factor. An options investor may lose the entire amount of their investment in a relatively short period of time. Supporting documentation for any claims will be supplied upon request.
Also, there are specific risks associated with covered call writing, including the risk that the underlying stock could be sold at the exercise price when the current market value is greater than the exercise price the call writer will receive. A covered call writer forgoes participation in any increase in the stock price above the call exercise price and continues to bear the downside risk of stock ownership if the stock price decreases more than the premium received.
Moreover, there are specific risks associated with buying options, including the risk that the purchased options could expire worthless. Also, the specific risks associated with selling cash-secured puts include the risk that the underlying stock could be purchased at the exercise price when the current market value is less than the exercise price the put seller will receive.
Furthermore, there are specific risks associated with trading spreads, including substantial commissions, because it involves at least twice the number of contracts as a long or short position and because spreads are almost invariably closed out prior to expiration. Multi-leg options including collar strategies involve multiple commission charges.
How margin interest applies to short positions is somewhat more complicated and is explained below.
Margin interest charges are based on the size of the debit in your account. They're compounded daily, and charged monthly. You'll see them reflected in your statement and online balances and transactions. Please view our margin interest rates for all customer accounts.
Understand how margin works for short positions
Whenever you make a short sale, you have to have enough funds (cash and/or purchasing power) to be able to buy the shares back at any time, no matter what the stock price is.
If you sell shares short, and they move against you (rise in price), you'll see funds moved from the cash and sweep section of your account into margin. Your margin balance will show an amount equal to what you'd need to have in order to buy back the shares.
If short shares continue to rise in price, and you don't have enough cash or sweep balance in your account to cover the position (buy back the shares), you'll begin to borrow on margin for this purpose. At that time, you'll also begin to accrue margin interest charges. These will be computed and charged the same as for a regular margin debit.
Remove margin trading from my account
You can remove margin trading from your account in one of the following ways:
- Call 1-800-ETRADE-1 to speak with a Financial Service Associate.
- Log into your account.
- Write us a letter and provide the following information:
- Your account number
- Your current trading level (for example, margin trading)
- The trading level you want to change to (for example, cash account)
By regular U.S. mail
E*TRADE Securities LLC
PO Box 484
Jersey City, NJ 07303-0484
By overnight mail
E*TRADE Securities LLC
Harborside Financial Center
501 Plaza 2
34 Exchange Place
Jersey City, NJ 07311
Note:
Before you can remove margin trading from your account, your debit balance must be paid in full and the Balances page must show a $0 margin debit balance. All short positions must be closed and all sales must be settled prior to removing margin trading. After you remove this account feature, you'll be able to place trades using only the available cash in your account.
What is Portfolio Margin
Portfolio Margin is a way of calculating margin maintenance requirements based on the overall risk of a group of related instruments. This differs from a strategy-based (traditional) margin account where requirements are applied to individual positions or to specific pre-defined options strategies (e.g. Spreads, Covered Calls/Puts, Straddles, etc.).
Typically, portfolio margin treatment provides greater leverage than strategy-based treatment for a portfolio of hedged positions. This means that investors who manage position risk by hedging positions with related securities will be able to invest in more market share with less capital commitment than required in a strategy-based margin account.
The increased leverage that portfolio margin allows does have the potential of increasing the risk in an account. For this reason, suitability and qualification requirements for opening a portfolio margin account are more stringent.
For convenience, E*TRADE displays positions in a Portfolio Margin account grouped into four high-level categories, referred to as Portfolio Types (described below). For the purposes of calculating margin requirements in a Portfolio Margin account, positions in these accounts are further grouped together into various Position Groups based on how the securities are related to each other.
Portfolio Type
Positions in a portfolio margin account are displayed in categories, called Portfolio Types, based on their eligibility for portfolio margin treatment and the type of underlying security/index. The Portfolio Type categories that positions will be allocated to are:
- Equity - Equity options and underlying stock.
- Broad-Based Index - Index options and ETFs that correspond to broad-based indices.
- Narrow-Based Index - Index options and ETFs that correspond to narrow-based (sector) indices.
- Portfolio Margin Ineligible - All positions not eligible for portfolio margin treatment (e.g. Bonds, Mutual Funds, non-Marginable Stock, etc.)
Position Groups
Positions in a portfolio margin account are further grouped together at different levels based on the market correlations between the positions. The three levels of position groups are Product Class, Product Group, and Portfolio Group. Each of these groups provides an additional layer of profit/loss offsets between positions.
- Product Class - A Product Class refers to all options and other related instruments that cover the same underlying securities, including the underlying security itself. The securities in a Product Class are "stressed" to determine the projected gains and losses of each security at pre-define intervals of underlier movement (using theoretical pricing projections). The gains and losses at each stress interval are offset for all securities in the Class, to determine the maximum projected loss for the entire Class. The basic example of a Product Class would be a stock and all of its related options.
- Product Group - A Product Group is basically a group of related Product Classes. Generally, Product Groups are used to combine correlated Classes, and allows for a portion of the net projected gains in one Class to offset the net projected losses in another Class when calculating margin maintenance requirements. The pre-defined Product Class correlations are defined by the Exchanges.
An example of a Product Group would be the Small Cap Indexes group, which includes Product Classes such as the S&P Small Cap 600 index, Russell MidCap Index, and S&P MidCap 400 index, etc. - Portfolio Group - A Portfolio Group is basically a group of related Product Groups. Similar to Product Groups, Portfolio Groups are used to combine correlated Product Groups, and allow for a portion of projected gains in one group to be offset against losses of another group. This provides a third level of offsets for reducing projected losses, thereby potentially reducing margin maintenance requirements.
Portfolio Groups are not as common as Product Groups. At this time, there is only one Portfolio Group as defined by the Exchanges. That Portfolio Group is U.S. Indexes (USIDX), which includes the U.S. Broad-Based Indexes group, NASDAQ, and Small Cap Indexes group.
Quick note regarding Portfolio Margin Ineligible securities
As mentioned above, some securities are not eligible for Portfolio Margin treatment. This means that, while these positions can be traded and held in a Portfolio Margin account, the margin maintenance requirements calculated for those positions will be the same as if they were held in a strategy-based (traditional) margin account. When previewing a new order, a notice will be shown in the order preview window indicating whether or not the security to be traded is eligible for Portfolio Margin treatment.
How are Portfolio Margin Requirements Calculated
Portfolio Margin maintenance requirements are calculated by "stressing" a group of related positions, and determining the maximum loss that the group of positions would incur over a range of market movements.
- Stressing - The term "stressing" refers to looking at a security's underlier price (stock or index) at multiple intervals in a range of positive and negative movements, and determining what would "theoretically" happen to the prices of the derivatives for that underlier. These theoretical price changes in the underlier and its derivatives are used to determine the potential profit and losses of positions held in these securities.
Typically, security prices are evaluated for 10 intervals within a range (i.e. 5 intervals of positive movement, 5 intervals of negative movement). Using a simple stock and option example, which have a stress range of +/-15%, here is an example:
Say that stock XYZ is current trading at $20 per share. Stressing the stock to a +/-15% range, with 10 intervals, would give the following result:
Stock Price Moves-15%-12%-9%-6%-3%Current
Price+3%+6%+9%+12%+15%New Stock Price$17.00$17.60$18.20$18.80$19.40$20.00$20.60$21.20$21.80$22.40$23.00Stock Profit/(Loss)(3.00)(2.40)(1.80)(1.20)(0.60)0.000.601.201.802.403.00
Now, for a long put option on XYZ with a strike price of $22.50, assuming the current price of the option was $2.75 per contract, the profit and loss for the put would be calculated based on the same intervals used for the underlying stock above:
Stock Price Moves-15%-12%-9%-6%-3%Current
Price+3%+6%+9%+12%+15%New Stock Price$17.00$17.60$18.20$18.80$19.40$20.00$20.60$21.20$21.80$22.40$23.00New Option Price$5.50$4.95$4.40$3.85$3.30$2.75$2.25$1.75$1.25$0.75$0.25Option Profit/(Loss)2.752.201.651.100.550.00(0.50)(1.00)(1.50)(2.00)(2.50)
-
Maximum Loss - The margin requirement for a group of related positions is based on the maximum loss across the entire stressing range for that group of positions. To calculate the maximum loss for a group of related securities, the profit and loss values are added together for each of the stressing intervals. These "net" profit and loss values are evaluated to determine at which interval the maximum loss would occur.
Using the example above, here is how the net profit and loss is calculated for each interval:
Stock Price Moves-15%-12%-9%-6%-3%Current
Price+3%+6%+9%+12%+15%Stock Profit/(Loss)(3.00)(2.40)(1.80)(1.20)(0.60)0.000.601.201.802.403.00Option Profit/(Loss)2.752.201.651.100.550.00(0.50)(1.00)(1.50)(2.00)(2.50)Net Profit/(Loss)(0.25)(0.20)(0.15)(0.10)(0.05)0.000.100.200.300.400.50
In this example, assuming a 1:1 ratio of stock shares vs. option contracts, the maximum loss for these two securities occurs at the -15% stressing interval. If a Portfolio Margin account held 1000 shares of the stock and 10 contacts of the put option (100 shares per contract), the maximum loss for this group of positions would be $250. This means that the margin maintenance requirement for these positions would also be $250.
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Profit/Loss Offsets - The above example represents a 100% profit/loss "offset". An "offset" is the reduction of a position's losses at one stressing interval by the profits of another position at the same interval. This means that when adding the option profits to the stock losses to determine the Net Profit/Loss values, the full amount of the option profits (i.e. 100%) are allowed to be "offset" against the stock losses. Typically, an underlier and its derivatives are allowed to offset 100% of profits against losses for the same stressing interval. Examples of this would be a stock and its options, or an index and its options. Both of these groups would be an example of a Product Class.
Sometimes, offsets are allowed between securities that do not share the same underlier, or in other words, are not part of the same Product Class. The position groups that allow offsets between different Product Classes are called Product Groups and Portfolio Groups (see What is Portfolio Margin). In Product Groups and Portfolio Groups, typically only a smaller percentage of profits from one position group are allowed to offset losses from another position group. Here is an example:
Assuming that two Product Classes, Index A and Index B, have the following Net Profit/Loss:
Product Class:Index A
Net Profit/(Loss)(5.00)(4.00)(3.00)(2.00)(1.00)0.001.002.003.004.005.00
Product Class:Index B
Net Profit/(Loss)4.003.503.002.502.000.00(0.50)(1.00)(1.50)(2.00)(2.50)
If these two Product Classes belonged to a Product Group that allowed an 80% offset, the profits for each Product Class would be reduced by 20% before applying the offset against the losses of the other Product Class.
Index A(5.00)(4.00)(3.00)(2.00)(1.00)0.000.801.602.403.204.00Index B3.202.802.402.001.600.00(0.50)(1.00)(1.50)(2.00)(2.50)Net Profit/(Loss)(1.80)(1.20)(0.60)0.000.600.000.300.600.901.201.50
The result would be a Maximum Net Loss for this Product Group of 1.80 per share or contract.
The example above describes the treatment of a Product Group, which is a group of related Product Classes. The same concept also applies to a Portfolio Group, which is simply a group of related Product Groups. -
Per Contract Minimum - A minimum margin maintenance requirement may be imposed if a group of positions is so well hedged that insufficient margin would be required based on the Maximum Net Loss for the group of positions. Per industry regulations, if the Maximum Net Loss does not meet or exceed a specified minimum requirement, per contract held in the position group, then a Per Contract Minimum requirement must be imposed.
Most instruments carry a Per Contract Minimum of $37.50 per contract, which is defined by the Exchanges. However, there are a few Index Options that may carry a higher Per Contract Minimum, as defined by the Exchanges.
Based on the example given above, under the "Maximum Loss" section, we showed that the Maximum Net Loss across the stressing range was $250 for a portfolio that held 1000 shares of the stock and 10 long put contracts. However, when considering the Per Contract Minimum, the requirement for this group of positions would actually be $375, since the $37.50 minimum on 10 contracts exceed the $250 Maximum Net Loss for stressing the positions. -
Requirements based on other Risk Factors - Portfolio Margin requirements at E*TRADE also provide automated requirement adjustments for other risk factors for the positions in the account, in addition to the risks from underlier price movement. This proactive approach helps protect the account from unexpected deposit requirements or liquidation actions, which may occur if these other risk factors are not identified on a real-time basis.
The factors that are considered in calculating Portfolio Margin requirements at E*TRADE are:- Quality of hedge
- Position concentration
- Implied volatility, time decay, and interest rate exposure
- Underlier risk (liquidity, volatility, new, etc.)
Portfolio Margin Purchasing Power and Margin Equity
The purchasing power in a Portfolio Margin account is displayed in a different format that in a strategy-based (traditional) margin account. In Portfolio Margin accounts, purchasing power is displayed in terms of Excess Equity.
Margin Equity - In Portfolio Margin accounts, all assets in the account contribute towards Margin Equity. Therefore, in a Portfolio Margin account, Margin Equity is always equal to Net Account Value. This value will always be displayed using real-time values for the positions held in the account.
Total Margin Requirements - Total Margin Requirements in a Portfolio Margin account include the total margin maintenance requirements for both Portfolio Margin Eligible and Ineligible securities. This is the amount of equity that must be maintained in the account at all times to avoid a House Call situation.
Excess Equity - Excess Equity is the amount of Margin Equity in the account in excess of the Total Margin Requirements. In other words:
Excess Equity = Margin Equity - Total Margin Requirements
Excess Equity will be reduced or increased dollar-for-dollar for any increase or decrease in Total Margin Requirements, as a result of trading or periodic restressing of the positions in the account. Excess Equity must remain positive in order to avoid being issued a House Call.
Available Excess Equity - Available Excess Equity is the amount of Excess Equity that can be applied to new orders that increase margin maintenance requirements. Available Excess Equity is reduced for requirements reserved for existing open orders, as well as Funds Withheld from Purchasing Power for recent deposits. In other words,
Available Excess Equity = Excess Equity - Open Order Reserve - Funds on Hold
When previewing a new order, a Purchasing Power section will be displayed on the Order Preview window, which will indicate if the new order will reduce Available Excess Equity, and by how much. This is a valuable tool to understand the impact of new orders on Purchasing Power and for managing overall margin leverage in a Portfolio Margin account.
How to meet a Portfolio Margin House Call
Due to the increased leverage typically provided by a Portfolio Margin account, the amount of time given to resolve a call situation in a Portfolio Margin account is generally shorter than the amount of time given in a strategy-based (traditional) margin account.
If your account enters into a call situation, we may take action in your account with or without notice to you. This action may involve selling securities in your account to meet the call, or closing short positions. E*TRADE Securities may sell any and all securities in your account at our discretion in these situations.
As such, you should monitor your account balances and positions very closely and make sure you react quickly when your account is in a call to bring your equity position up to the minimums.
When a Portfolio Margin account enters into a call situation, the account will be limited to accepting only orders which reduce margin maintenance requirements, thereby reducing the amount of the call.
A Portfolio Margin account could enter into a call situation either by a reduction in account equity due to market fluctuation, or an increase in margin maintenance requirements due to market fluctuation, trade execution, manual increase by the Margin Department, or any combination of these. The order validation logic in our systems rejects most orders that would result in house calls, but occasionally they do occur due to intraday price fluctuations or transactions unknown to the system.
If you receive a Portfolio Margin house call, we'll send a SmartAlert message letting you know. Please be aware, however, that you are responsible for monitoring your own account status.
There are two basic ways to meet a Portfolio Margin call:
- Deposit additional funds.
Our preference, when your Portfolio Margin account is in a margin call, is that you send in sufficient funds to meet the call.
Our general recommendation for depositing additional funds to meet a Portfolio Margin call is that you either wire the funds or deposit the funds electronically using the Transfer Money system. Due to the accelerated nature of margin calls in a Portfolio Margin account, sending funds via overnight courier (such as FedEx or UPS) is not an acceptable method of deposit to meet a Portfolio Margin call.
If your equity continues to drop after you've met the call, in most cases, you'll receive an additional call. Please be aware that we may take action in your account without notice.
- Liquidate securities.
If you're unable to deposit the required funds or do not wish to, you may liquidate enough shares in your account to bring the equity back to the minimum requirement. Please note, if a Portfolio Margin call occurs due to trade execution, liquidating securities to meet the call may be considered a liquidation violation. If you incur three liquidation violations in a rolling 12 month period, a 90-day trading restriction may be placed on your account.
Liquidating securities to meet a call does not guarantee we will not take action in your account. If you do not liquidate enough securities to meet the call, or if your equity continues to decline, we may either issue another call or take action in your account at our discretion -- without further notice.
Liquidating securities to meet a call in a Portfolio Margin account carries additional risk due to the complexity of the margin requirement calculations, and the potential changes to the account's risk profile when trading in and out of securities positions.
- You are responsible for any losses incurred when securities in your account are automatically liquidated.
- If your equity continues to drop, you may receive an additional call. If the drop is severe, your securities may be sold without prior notice. You are not entitled to choose which securities will be sold to meet the call.
- We apply your cash deposit against your debit balance, which includes interest charged on the amount you borrowed.
- House margin requirements can change without notice. In some instances, such changes could put you into an immediate call, which you would be required to satisfy.
How to meet a Portfolio Margin Minimum Equity Call
Under FINRA and NYSE rules, a Portfolio Margin account at E*TRADE must maintain a minimum of $100,000 in equity at all times. If the equity in a Portfolio Margin account falls below $100,000, the account will be limited to accepting only orders which reduce margin maintenance requirements. This restriction will continue until the equity rises above $100,000.
If you receive a Portfolio Margin minimum equity call, we'll send a SmartAlert message letting you know. Please be aware, however, that you are responsible for monitoring your own account status.
If the minimum equity call situation persists for an extended period of time, the Margin Department may, at its own discretion, require that the Portfolio Margin account assets be moved to a strategy-based (traditional) margin account.
You can satisfy a Portfolio Margin minimum equity call in one or more of the following ways:
- Deposit additional funds into your account
- Deposit additional securities into your account
- The account equity rises above $100,000 due to market appreciation
Portfolio Margin interest rates
Portfolio Margin accounts are subject to the same margin interest rates as a strategy-based (traditional) margin account.
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View margin interest rates
See our current standard margin interest rates.
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View Pro Elite margin interest rates
See our current margin rates for Pro Elite accounts.
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