Question

You are bearish on IBM and decide to sell short 100 shares at the current market price of $100 per share. The broker's initial margin requirement is 50% of the value of the short position. The maintenance margin is 20% of the value of the short position. How high can the price of the stock go before you get a margin call?

Answer 1

Current market price of the is $100 and number of shares is 100, In this case amount which had to be kept in the account will be $10000 (Value of the short sale ) and $ 5000 ( 50% as intial margin requirement) . Total amount held in account $15,000.

Now , if I value of the share increases, I will have to pay maintainence margin which is 20% of the short price.

Again, before the margin call price of the shares can increase to the extent that total of short sale value and maintainence margin are less than or equal to $15000 i.e. amount held in account.

So, let short sale amount = X

maintainenece margin = 20% of X

Now, X + .20X (20% OF X) = 15000

1.20X = 15000

X = 15000 / 1.20 = 125000

Price per share = 125000 / 100 = 125

So, share price can go upto $125 before margin call is made.