Margin problems can be tricky and sometimes they can lead to losses that an investor is unprepared for. Many investors setup “stress checks” at specific S&P or NASDAQ Index valuations. A common one on the S&P 500 for example, was 2000. Many investors had used 2000 as their point of where margin calls may start appearing. Others picked 1900 and others 1800. Longer-term investors would use 1750, 1600 or 1400. Recently an investor wrote me who is concerned about a market drop to 1400. Let’s review the question and then look at some suggestions. The question has been slightly adjusted to accommodate this article.
I am in a serious mess with my options. If the market drops to 1400 in the next couple of months I will get a margin call and I cannot figure out a way to avoid it. I went into 2016 feeling over extended and planning to only close positions as economically as possible until I could get into a more suitable amount of risk. I have reduced a lot of risk by buying back options by spending tens of thousands of dollars and also moving more and more into cash. I got myself in a better position. But my stress test was only down to 1600. At 1400 I will be in very serious trouble. Karen
Using margin can definitely boost returns and often in a very big way. At the same time, just as it can be helpful, it can also cause losses, especially when positions that have been setup to take advantage of margin begin to fail.
Beat The Bear – 6 Tips To Control Margin Calls
This is a strategy discussion article for FullyInformed Members. It is 3500 words in length and will require 8 pages if printed. Margin is something most active investors use every day. In corrections, bear markets, or when holding shares short, getting a margin call can lead to losses and concern.
Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done. The author may or may not enter the trades mentioned. Some positions in mentioned stocks may already be held or are being adjusted.
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