Margin account: how to calculate the stock price that might trigger a liquidation of positions?
Thanks to this youtube video I think I understood the required calculation. Based on following notation: then the formula to find x is: I found afterwards an example on IB site (click on the link 'How to Determine the Last Stock Price Before We Begin to Liquidate the Position') that corroborate the formula above.
What Jaydles said. I think of each strategy in terms of Capital at Risk (CaR). It's a good thing to know when considering any position. And then conveniently, the return is always profit / CaR. With covered calls it's pretty easy. Pay $1000 for stock, receive $80 in premium, net CaR is $920.  If you own the stock and write calls many times (that expire worthless, or you that you buy back), there are two measurements to consider. First, treat every covered call as a buy-write. Even if you already own the stock, disregard the real cost basis, and calculate from the moment you write the call, using the stock price at that time. The second measure is more complicated, but involves using something like the XIRR function in a spreadsheet. This tracks the series as a whole, even accounting for times where there is no written call outstanding. For the written put, even though your broker may only require 30% collateral in a margin account, mentally treat them as cash-secured. Strike less premium is your true CaR. If the stock goes to zero by expiration, that's what you're on the hook for. You could just compute based on the 30% collateral required, but in my view that confuses cash/collateral needs with true risk. Note: a written put is exactly identical to a covered call at the same strike. If you tend to favor puts over CCs, ask yourself why. Just like a loaded gun, leverage isn't inherently bad, but you sure want to know when you're using it. "The margin rules are also more complicated.  A simple buy on a non-margin account will never run into margin rules and you can just wait out any dips if you have confidence the stock will recover.  A ""simple"" short sell might get you a call from your broker that you have a margin call, and you can't wait it out without putting more money in.  Personally I have trouble keeping the short sale margin rules straight in my head, at least compared to a long sale. I got in way over my head shorting AMZN once, and lost a lot of money because I thought it was overvalued at the time, but it just kept going up and I wanted it to go down.   I've never gotten stuck like that on a long position." "(See also the question How many stocks I can exercise per stock warrant? and my comments there). Clearly, at the prices you quote, it does not seem sensible to exercise your warrants at the moment, since you can still by ""units"" (1 stock + 1/3 warrant) and bare stock at below the $11.50 it would cost you to exercise your warrant.  So when would exercising a warrant become ""a sensible thing to do""? Obviously, if the price of the bare stock (which you say is currently $10.12) were to sufficiently exceed $11.50, then it would clearly be worth exercising a warrant and immediately selling the stock you receive (""sufficiently exceed"" to account for any dealing costs in selling the newly-acquired stock). However, looking more closely, $11.50 isn't the correct ""cut-off"" price. Consider three of the units you bought at $10.26 each. For $30.78 you received three shares of stock and one warrant. For an additional $11.50 ($42.28 in total) you can have a total of four shares of stock (at the equivalent of $10.57 each). So, if the price of the bare stock rises above $10.57, then it could become sensible to exercise one warrant and sell four shares of stock (again allowing a margin for the cost of selling the stock). The trading price of the original unit (1 stock + 1/3 warrant) shouldn't (I believe) directly affect your decision to exercise warrants, although it would be a factor in deciding whether to resell the units you've already got. As you say, if they are now trading at $10.72, then having bought them at $10.26 you would make a profit if sold. Curiously, unless I'm missing something, or the figures you quote are incorrect, the current price of the ""unit"" (1 stock + 1/3 warrant; $10.72) seems overpriced compared to the price of the bare stock ($10.12). Reversing the above calculation, if bare stock is trading at $10.12, then four shares would cost $40.48. Deducting the $11.50 cost-of-exercising, this would value three ""combined units"" at $28.98, or $9.66 each, which is considerably below the market price you quote. One reason the ""unit"" (1 stock + 1/3 warrant) is trading at $10.72 instead of $9.66 could be that the market believes the price of the bare share (currently $10.12) will eventually move towards or above $11.50. If that happens, the option of exercising warrants at $11.50 becomes more and more attractive. The premium presumably reflects this potential future benefit. Finally, ""Surely I am misunderstand the stock IPO's intent."": presumably, the main intent of Social Capital was to raise as much money as possible through this IPO to fund their future activities. The ""positive view"" is that they expect this future activity to be profitable, and therefore the price of ordinary stock to go up (at least as far as, ideally way beyond) the $11.50 exercise price, and the offering of warrants will be seen as a ""thank you"" to those investors who took the risk of taking part in the IPO. A completely cynical view would be that they don't really care what happens to the stock price, but that ""offering free stuff"" (or what looks like ""free stuff"") will simply attract more ""punters"" to the IPO. In reality, the truth is probably somewhere between those two extremes." Value investing is an investment approach that relies on buying securities below their intrinsic values. There are two main concepts; one is the Intrinsic Value and the other is Margin of Safety.  Intrinsic value is the value of the underlying business - if we are talking about stocks - that can be calculated through carefully analyzing the business looking at all aspects of it. If there is an intrinsic value exists for a company then there is a price tag we can put on its shares as well. Value investing is looking to buy shares well below its intrinsic value.  It is important to know that there is no correct intrinsic value exists for a company and two people can come up with different figures, if they were presented the same data. Calculating the intrinsic value for a business is the hardest part of value investing.  Margin of Safety is the difference between the buying price of a stock and its intrinsic value. Value investors are insisting on buying stocks well below their intrinsic value, where the margin of safety is 20%-30% or even more. This concepts is protecting them from poor decisions and market downturns. It is also providing a room for error, when calculating the intrinsic value.  The approach was introduced by Benjamin Graham and David Dodd in a book called Security Analysis in 1934. Other famous investor using this approach is Warren Buffet Books to read:  I would start to read the first two book first. There isn't a formula like that, there is only the greed of other market participants, and you can try to predict how greedy those participants will be. If someone decided to place a sell order of 100,000 shares at $5, then you can buy an additional 100,000 shares at $5. In reality, people can infer that they might be the only ones trying to sell 100,000 shares right then, and raise the price so that they make more money. They will raise their sell order to $5.01, $5.02 or as high as they want, until people stop trying to buy their shares. It is just a non-stop auction, just like on ebay. The initial position is worth 40000. You post 50% margin, so you deposited 20000 and borrowed 20000. 6% of 20000 is 1200. I’m going to answer this because: Accounting books only reflect the dollar value of inventories. Which means if you look at the balance sheet of McDonalds, you will not see how many bags of French fries are remaining at their storage facility, you will only see the total value at cost basis.  Your requirement for noting the number of shares purchased is not part of the double entry accounting system.  When you transfer $10000 from bank to broker, the entries would be:  The bank’s name and the broker’s name will not appear on the balance sheet.  When you purchase 50 shares at $40 per share, the accounting system does not care about the number of shares or the price. All it cares is the $2000 total cost and the commission of $10.  You have two choices, either place $10 to an expense account, or incorporate it into the total cost (making it $2010).  The entries for the second method would be: Now your balance sheet would reflect: What happens if the price increases from $40 per share to $50 per share tomorrow? Do nothing. Your balance sheet will show the cost of $2010 until the shares are sold or the accounting period ends. It will not show the market value of $2500.  Instead, the Portfolio Tracker would show $2500. The most basic tracker is https://www.google.com/finance/portfolio .  Later if you finally sell the shares at $50 per share with $10 commission: Again, the number of shares will not be reflected anywhere in the accounting system. Only the total proceeds from the sale matters. "I assume that whatever you're holding has lost a considerable amount of its value then? What sort of instrument are we talking about? If the margin call is 14k on something you borrowed against the 6900 you're a bit more leveraged than ""just"" another 100%. The trading company you're using should be able to tell you exactly what happens if you can't cover the margin call, but my hunch is that selling and taking the cash out ceased to be an option roughly at the time they issued the margin call. Being labelled as a day trader or not most likely did not have anything to do with that margin call - they're normally issued when one or more of your leveraged trades tank and you don't have enough money in the account to cover the shortfall. Not trying to sound patronising but the fact that you needed to ask this question suggests to me that you shouldn't have traded with borrowed money in the first place."