Sizing a Margin Position So It Survives a Bad Month

How far could this stock fall in a bad month? Most margin buyers find out when the call arrives. It works better the other way round, because once you have picked a number, the maintenance requirement turns it into a precise upper limit on the loan.

The formula, built from the call

A call arrives when equity drops below the requirement. Write the position’s starting value as V, the loan as L, the fall as f and the maintenance rate as m. After the fall the holding is worth V x (1 - f), and your equity is that value minus the unchanged loan. For no call, equity must still be at least m times the new value, which means the loan can be no more than (1 - m) times what the position is worth after the fall.

Divide both sides by V.

Loan / starting value ≤ (1 - fall) x (1 - maintenance)

That is the whole test. Pick the fall, read the requirement off the broker’s page, multiply.

A worked size

Take a hypothetical stock the broker holds at a 30% house requirement, above FINRA’s 25% floor, and a fall of 30% you want to live through without a call.

The account ends the bad month exactly on the line. It survives, just.

A 49% loan also sits under the Federal Reserve Board’s 50% Regulation T limit on a new purchase, so the broker would let you open it. The two rules measure different things. Regulation T caps the loan at the moment of purchase, while the maintenance requirement decides whether you get to keep the position through every day after that, including the bad ones.

The loan limit shrinks quickly as the fall you plan for gets deeper. At the same 30% requirement:

Fall to survive	Largest loan, share of position
20%	56% (Regulation T caps a new purchase at 50%)
30%	49%
40%	42%
50%	35%

Each extra ten points of protection costs seven points of loan. Deeper protection means a smaller position, and a trader who wants both a big position and a deep cushion is asking the arithmetic for something it cannot give, since every dollar of extra borrowing moves the call price closer to where the stock trades today.

Why exactly on the line is too close

Each input to the formula can move.

Prices gap. A stock that closes down 20% can open down 35% after bad news, and the fall you planned for is gone before any order can fill. A stop order is no help there.

The requirement moves. Suppose the broker lifts the house level on this stock from 30% to 40%, which the margin agreement allows it to do at any time. The same 49% loan now triggers a call after a fall of 1 - 0.49 / 0.60, about 18.3%, so a position built to take a 30% hit is suddenly called on a fall not much bigger than half of it.

The loan grows. Unpaid interest adds to it every month, as an earlier lesson showed, and a larger loan against the same shares raises the call price a little more each time the statement posts.

So add a buffer. Size for a bigger fall than the one you expect. How much bigger is a judgment call, and a single stock held through an earnings report, or a small company that trades thinly, deserves more room than a broad fund you mean to hold for years.

The position is smaller by about $4,700. That is the price of the buffer, and it buys a position that can take a fall ten percentage points deeper before the broker has a say.

Running your own numbers

The margin call calculator gives the call price for any position and loan. Check a planned size there before placing the order. The leverage calculator shows how much a move in the stock is magnified at that size, and the margin interest calculator prices the loan by the month. For the argument that every borrower should know that price in advance, read your margin call price is a number you can work out today, and for the limits on the loan itself, see how much you can borrow on margin.

Everything in the course comes back to one habit: work out what the loan does on a bad day before you take it on a good one.