The Best Ways to Meet a Margin Call

What I'm about to say might seem glib, but the very best way to avoid disturbing portfolios when margin calls are triggered ... is just sending in more cash. Most people, however, are not able or amenable to doing that. I get plenty of questions regarding the priority trades when you simply have to lighten up on positions. The trade that frees up buying power fastest is always the liquidation of call or put options, which you own already. Long option positions are non-marginable. Because of that, selling them to close acts just like adding cash. You'll get back double-buying power. The sale of $10,000 of options held, for example, provides an instant $20,000 in buying power. Likewise, liquidation of low-priced stocks (typically under $3) or other non-marginable securities act just like the option sales described above. You get double buying power back immediately. Selling marginable stocks helps, but they typically only free up 30% of their current values, because that is the maintenance margin requirement according to Security and Exchange Commission rules. You'd need to sell down $30,000 of marginable shares to net out just $9,000 of a margin call. If you decide to sell shares that had covered calls on them, don't forget to buy to close those calls back to avoid going naked. If you fail to close out those, now naked, calls the expected margin relief won't appear. Buying to Close (BTC) far out-of-the-money puts works to meet margin requirements in a cost effective way. It hurts to pay to close puts, which are almost certain to expire worthless. That said, that very status makes them cheap to buy. Let's look at BTC 12 Caleres contracts of a Jan. 21, 2022 $20 puts on a stock that trades for $27 and only cost 28 cents per share last week. Eliminating that $24,000 face value of potential buys can help a lot in meeting margin calls. Including commissions and fees, the $343 cost can mean not having to sell positions with much higher rebound potential. Ditto for any uncovered call options you might have sold before the market tanked. Closing out those big winners early for very small dollar amounts can save you from needing to uproot long-term holdings which you don't want to part with. The trades above are as shown on Charles Schwab's transaction history page. They illustrate the account of a friend that became overextended due to last Friday's and this week's abrupt selloffs. Spending $275 or so to close four Berry Global Jan. 21 puts freed up $24,000 in face value of buying power. I already covered the mechanics involved in the BTC on Caleres' January $20 puts. Selling 400 CVS last week at an average of $94 or so looks good today even after paying around 27 cents a share to avoid going naked. Liquidating those 400 shares brought in about $37,600 while paying down $11,280 of his margin call. Buying back near-the-money or in-the-money puts during market panics should be avoided if possible. High implied volatility sends put prices much higher making them expensive to close. Unless you think things won't calm down it's better to wait a bit. Selling shares involves no time-premium payments and is a preferred choice vs. closing puts during plunges. It is never fun to find your reserves were inadequate to prevent margin problems. You can't stick your head in the sand, though, as your brokerage firm will eventually start selling off stocks or closing out options at random, and not according to what you'd pick on your own. They don't care about waiting for limit orders to fill or whether they are getting good prices. They only worry about protecting themselves. Make the best of the situation by judiciously selling down long options, shares you own, or buying to close options, which will free up buying power to ride out the storm. Rebounds follow sharp declines just as rainbows follow downpours. Once the weather clears up, you can often put back even better positions than the ones you eliminated.

The Best Ways to Meet a Margin Call

Here's how to make the best of a tough situation and free up buying power to ride out the storm.

Columnist Conversation

This Weekend on Real Money

My Updated Market Stance

Friday Morning Fibocall for 1/21/2022

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.