How to calculate how far a shorted stock's price can rise before broker issues a margin call?
Most brokers have a margin maintenance requirement of 30%.  In your example, it would depend on how much money you're borrowing from your broker on margin. Consider this: You have $250, and short AAPL at $500 on margin. This would be a common scenario (federal law requires investors to have at least 50% of their margin equity when opening a transaction). If your broker had a requirement of 30%, they would require that for your $500 position, you have at least $500 * .3 = $150 equity. Since you are currently above that number at $250, you will not be hit with a margin call. Say the price of AAPL doubles, and now your position is worth $1000. $1000 * .3 = $300, which is $50 above your initial equity. Your broker will now consider you eligible for a margin call. Most will not execute the call right away, you will often have some time to either sell/cover stock or add funds to your account. But not all brokers will warn you if you are breaking margin requirements, and sometimes margin calls can take you by surprise if you are not paying attention. Also, many will charge interest on extra margin borrowed. "When margin is calculated as the equity percentage of an account, the point at which a broker will forcibly liquidate is typically called ""maintenance margin"". In the US, this is 25% for equities. To calculate the price at which this will occur, the initial and maintenance margin must be known.  The formula for a long with margin is: and for a short where P_m is the maintenance margin price, P_i is the initial margin price, m_i is the initial margin rate, and m_m is the maintenance margin rate.  At an initial margin of 50% and a maintenance margin of 25%, a long equity may fall by 1/3 before forced liquidation, a short one may rise by 50%. This calculation can become very complex with different asset classes with differing maintenance margins because the margin debt is applied to all securities collectively."
"There are three ways to do this. So far the answers posted have only mentioned two.  The three ways are: Selling short means that you borrow stock from your broker and sell it with the intent of buying it back later to repay the loan.  As others have noted, this has unlimited potential losses and limited potential gains.  Your profit or loss will go $1:$1 with the movement of the price of the stock. Buying a put option gives you the right to sell the stock at a later date on a price that you choose now.  You pay a premium to have this right, and if the stock moves against you, you won't exercise your option and will lose the premium.  Options move non-linearly with the price of the stock, especially when the expiration is far in the future.  They probably are not for a beginner, although they can be powerful if used properly. The third option is a synthetic short position.  You form this by simultaneously buying a put option and selling short a call option, both at the same strike price.  This has a risk profile that is very much like the selling the stock short, but you can accomplish it entirely with stock options.  Because you're both buying an selling, in theory you might even collect a small net premium when you open. You might ask why you'd do this given that you could just sell the stock short, which certainly seems simpler.  One reason is that it is not always possible to sell the stock short.  Recall that you have to borrow shares from your broker to sell short.  When many people want to short the stock, brokers will run out of shares to loan.  The stock is then said to be ""hard to borrow,"" which effectively prevents further short selling of the stock.  In this case the synthetic short is still potentially possible." If this is the initial transaction, the rules of a short margin account say that if you shorted 1000 share of ABC at $5/share your credit balance would be $5000 from the short plus you would have to put up yourself $5000 cash or $10,000 of marginal securities. So this is not really leveraging using margin. You have to put in just as much as the short generates. Is that what this relates to? Once the initial purchase has been made the minimum maintenance for a stock trading under $5 per share is 100% of the short market value in the margin account or $2.50 per share whichever is greater. For stock trading at $5/share or greater the minimum maintenance requirement is $5/share or 30% of the short market value, whichever is greater. The minimum maintenance requirements can be tighter. "I think the issue you are having is that the option value is not a ""flow"" but rather a liability that changes value over time. It is best to illustrate with a balance sheet. The $33 dollars would be the premium net of expense that you would receive from your brokerage for having shorted the options. This would be your asset. The liability is the right for the option owner (the person you sold it to) to exercise and purchase stock at a fixed price. At the moment you sold it, the ""Marked To Market"" (MTM) value of that option is $40. Hence you are at a net account value of $33-$40= $-7 which is the commission. Over time, as the price of that option changes the value of your account is simply $33 - 2*(option price)*(100) since each option contract is for 100 shares. In your example above, this implies that the option price is 20 cents. So if I were to redo the chart it would look like this If the next day the option value goes to 21 cents, your liability would now be 2*(0.21)*(100) = $42 dollars. In a sense, 2 dollars have been ""debited"" from your account to cover your potential liability. Since you also own the stock there will be a credit from that line item (not shown). At the expiry of your option, since you are selling covered calls, if you were to be exercised on, the loss on the option and the gain on the shares you own will net off. The final cost basis of the shares you sold will be adjusted by the premium you've received. You will simply be selling your shares at strike + premium per share (0.20 cents in this example)" Your original example is a little confusing because just shorting for 1k and buying for 1k is 100% leveraged or an infinitive leverage ratio. (and not allowed) Brokerage houses would require you to invest some capital in the trade.  One example might be requiring you to hold $100 in the brokerage.  This is where the 10:1 ratio comes from. (1000/10) Thus a return of 4.5% on the 1000k bond and no movement on the short position would net you $45 and voila a 45% return on your $100 investment. A 40 to 1 leverage ratio would mean that you would only have to invest $25 to make this trade.  Something that no individual investor are allowed to do, but for some reason some financial firms have been able to. For every seller, there's a buyer. Buyers may have any reason for wanting to buy (bargain shopping, foolish belief in a crazy business, etc).  The party (brokerage, market maker, individual) owning the stock at the time the company goes out of business is the loser . But in a general panic, not every company is going to go out of business. So the party owning those stocks can expect to recover some, or all, of the value at some point in the future. Brokerages all reserve the right to limit margin trading (required for short selling), and during a panic would likely not allow you to short a stock they feel is a high risk for them. This is the bird's eye view of how shorting works: When you place an order to sell a stock short, your broker attempts to grab the desired number of shares from any accounts of its other customers and makes them available for you to sell. If no other customers own shares of this stock, then generally you are out of luck (It is more complicated like that in practice, but this is just an overview).    Your odds are better if the particular stock has a large float (i.e. a large number of shares that are actually available for trading) and its short ratio is low (which means relatively few shares   are currently being sold short). Also, a large brokerage may be more likely to have access to the shares than a small niche-market broker.   The example you've given, Angie's List (ANGI) is a $600M small-cap with a comparatively low float, and though I haven't been able to glean the short ratio, it appears that a lot of investors are bearish on this stock and probably already had the same idea to short it.  There is really no way to find out if a specific broker has shares in inventory available for shorting, short of (forgive the pun) checking directly with the broker. You sold a call, and have a risk if the stock rises.  You bought a put and gain when the stock drops. You, sir, have a synthetic short position.  It's Case 3 from your linked example: Suppose you own Long Stock and the company is going to report earnings   but you’re going on vacation. How can you hedge your position without   selling your stock? You can short the stock synthetically with   options! Short Stock = Short Call + Long Put They conclude with the net zero remark, because the premise was an existing long position. A long plus this synthetic short results in a neutral set of positions (and the author's ability to go on vacation not concerned about any movement in the stock.) Depends on the stock involved, but for the most part brokerages allow you gain entry at 50%, meaning you can short twice the cash on hand you have.   Going forward, you need to maintain 30%, so on a $10,000 short, you'd have to maintain $3000 in your account. Example, an account with $5000 cash - You can short $10,000 securities.  Let say 100 shares of xyz at $100 per share. After trade settles, you won't receive a margin call until your balance falls to $3000, probably right around the time xyz rises to $120 per share.  Riskier stocks will have higher margin maintenance requirements - leveraged vehicles like FAS/FAZ (triple leveraged) require 90% margin (3x30%) if they are allowed to be 'shorted' at all. "In the USA there are two ways this situation can be treated. First, if your short position was held less than 45 days. You have to (when preparing the taxes) add the amount of dividend back to the purchase price of the stock. That's called adjusting the basis. Example: short at $10, covered at $8, but during this time stock paid a $1 dividend. It is beneficial for you to add that $1 back to $8 so your stock purchase basis is $9 and your profit is also $1. Inside software (depending what you use) there are options to click on ""adjust the basis"" or if not, than do it manually specifically for those shares and add a note for tax reviewer. Second option is to have that ""dividednd payment in lieu paid"" deducted as investment expence. But that option is only available if you hold the shorts for more than 45 days and itemize your deductions. Hope that helps!" Thanks for your reply. I’m not familiar with the term “Held-For-Trading Security”. My securities are generally held as collateral against my shorts. To clarify, I am just trying to track the “money in” and “money out” entries in my account for the shorts I write. The transaction is relatively straight forward, except there is a ton of information attached! In simple terms, for the ticker CSR and short contract CSRUQ8, the relevant entries look something like this: There are no entries for expiries. I need to ensure that funds are available for future margin calls and assignments. The sale side using covered calls is as involved. Try using technical analysis, look at the charts and look for stocks that are uptrending. The dfinition of an uptrend being higher highs and higher lows. Use a stochastic indicator and buy on the dips down when the stochastic is in the oversold position (below 20) and and crossing over about to turn back upwards. Or you can also use the stochastic to trade shares that have been ranging between two prices (say between $10 and $12) for a while. As the price approaches the $10 support and the stochastic is in oversold, you would buy as the price rebounds off the $10 support and the stochastic crosses and starts rebounding back up. As the price starts reaching the resistance at $12 (with stocastic in overbought at above 80) you would look to sell and take profits. If you were able to do short selling in the competition, you could short sell at this point in time and make profits on the way up as well as on the way down. There are many more techniques you could use to set up trade opportunities using technical analysis, so it may be a subject you could research further before the comptition begins. Good luck. "Yes, you could sell what you have and bet against others that the stock price will continue to fall within a period of time ""Shorting"".  If you're right, your value goes UP even though the stock price goes down. This is a pretty darn risky bet to make.  If you're wrong, there's no limit to how much money you can owe.  At least with stocks they can only fall to zero!  When you short, and the price goes up and up and up (before the deadline) you owe it! And just as with stocks, someone else has to agree to take the bet.  If a stock is pretty obviously tanking, its unlikely that someone would oppose your bet. (It's probably pretty clear that I barely know what I'm talking about, but I was surprised not to see this listed among the answers.)" I just called options express, and apparently you need a margin account for futures and options, but you don't NEED margin to trade futures. I will have to debate the merits, but I think I may try playing with it once I build up my regular stock account. Short selling can be a good strategy to hedge, but you have almost unlimited downside.  If a stock price skyrockets, you may be forced to cover your short by the brokerage before you want to or put up more capital. A smarter strategy to hedge, that limits your potential downside is to buy puts if you think the market is going down.  Your downside is limited to the total amount that you purchased the put for and no more. Another way to hedge is to SELL calls that are covered because you own the shares the calls refer to.  You might do this if you thought your stock was going to go down but you didn't want to sell your shares right now.  That way the only downside if the price goes up is you give up your shares at a predetermined price and you miss out on the upside, but your downside is now diminished by the premium you were paid for the option. (You'd still lose money if the shares went down since you still own them, but you got paid the option premium so that helps offset that). On expiry, with the underlying share price at $46, we have : You ask :  How come they substract 600-100. Why ? Because you have sold the $45 call to open you position, you must now buy it back to close your position.  This will cost you $100, so you are debited for $100 and this debit is being represented as a negative (subtracted); i.e., -$100 Because you have purchased the $40 call to open your position, you must now sell it to close your position.  Upon selling this option you will receive $600, so you are credited with $600 and this credit is represented as a positive (added) ; i.e., +$600. Therefore, upon settlement, closing your position will get you $600-$100 = $500.  This is the first point you are questioning.   (However, you should also note that this is the value of the spread at settlement and it does not include the costs of opening the spread position, which are given as $200, so you net profit is $500-$200 = $300.) You then comment :  I know I am selling 45 Call that means : As a writer: I want stock price to go down or stay at strike. As a buyer: I want stock price to go up. Here, note that for every penny that the underlying share price rises above $45, the money you will pay to buy back your short $45 call option will be offset by the money you will receive by selling the long $40 call option.  Your $40 call option is covering the losses on your short $45 call option. No matter how high the underlying price settles above $45, you will receive the same $500 net credit on settlement.  For example, if the underlying price settles at $50, then you will receive a credit of $1000 for selling your $40 call, but you will incur a debit of $500 against for buying back your short $45 call.  The net being $500 = $1000-$500.  This point is made in response to your comments posted under Dr. Jones answer.