A margin maintenance call (MCL) happens when margin equity falls below an account's margin maintenance requirement. Margin maintenance calls must be resolved within 2 business days. Marginable equity positions have a 30% long maintenance requirement or a 30% short maintenance requirement. This is the amount of equity you're required to maintain to avoid a maintenance call.
Let's say you have $12,000 in long market value, $7,000 in margin debit and all positions in your account are held to a 30% maintenance requirement. Your equity is 42%, so you're in the clear.
Calculation: Long market value $12,000 - $7,000 in margin debit = $5,000 in margin equity (42%)
But what happens if the value of your holdings drop in value and your long market value drops to $9,000? Your equity falls to 22%, so a margin call in the amount of $700 will be issued to bring your account equity back to 30%.
Calculation: Long market value $9,000 - $7,000 in margin debit = $2,000 in margin equity (22%)
For illustration purposes only
Let's say you have $14,000 in margin credit, $10,000 in short market value and all positions in your account are held to a 30% maintenance requirement. Your equity is 40%, so you're in the clear.
Calculation: $14,000 margin credit - $10,000 short market value = $4,000 in margin equity (40%)
But what happens if the value of your holdings rise to $11,500 in short market value? Your equity falls to 22%, so a margin call of $950 will be issued to bring your account equity back to 30%.
Calculation: $14,000 margin credit - $11,500 in short market value = $2,500 in margin equity (22%)
For illustration purposes only
Let's say you have $10,000 in long market value, $10,000 in short market value, $15,000 margin credit, $7,000 margin debit and all positions in your account are held to a 30% maintenance requirement. Your equity is 40%, so you're in the clear.
Calculation: $10,000 long market value - $10,000 short market value + $15,000 margin credit - $7,000 margin debit = $8,000 in margin equity (40%)
In a long/short scenario, downward movement in the long positions could be offset by downward movement in the short positions. In order to determine what caused a maintenance call, you'd need to evaluate the short and long positions separately.
Refer to the long and short examples for more information on how to calculate the long and short sides of your account to determine your account equity.
For illustration purposes only
Let's say you have $111,000 in long market value, $60,000 margin debit and all positions in your account are held to a 40% maintenance requirement. Your equity is 46%, so you're in the clear. Refer to the long position example to help determine your account equity.
Calculation: $110,000 long market value - $60,000.00 margin debit = $50,000 in margin equity (46%)
In this scenario, the margin requirement is elevated to 40% to account for the concentration in a single position. If you borrow in a margin account and concentrate your leverage into a single/small number of holdings then you are amplifying your risk profile. The risk to you and to Merrill is elevated in comparison to if you had numerous holdings in your margin account.
For illustration purposes only
Options involve risk and are not suitable for all investors. Certain requirements must be met to trade options. Before engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the risks involved in investing with options. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options (PDF)" before considering any option transaction. You may also call the Investment Center at 877.653.4732 for a copy. A separate client agreement is needed. Multi-leg option orders are charged one base commission per order, plus a per-contract charge.
The maximum loss, gain and breakeven of any options strategy only remains as defined so long as the strategy contains all original positions. Trading, rolling, assignment, or exercise of any portion of the strategy will result in a new maximum loss, gain and breakeven calculation, which will be materially different from the calculation when the strategy remains intact with all of the contemplated legs or positions. This is applicable to all options strategies inclusive of long options, short options and spreads. To learn more about Merrill's uncovered option handling practices, view
Naked Option Stress Analysis (NOSA) (PDF).
Early assignment risk is always present for option writers (specific to American-style options only). Early assignment risk may be amplified in the event a call writer is short an option during the period the underlying security has an ex-dividend date. This is referred to as dividend risk.
Long options are exercised and short options are assigned. Note that American-style options can be assigned/exercised at any time through the day of expiration without prior notice. Options can be assigned/exercised after market close on expiration day. View specific
Merrill Option Exercise & Assignment Practices (PDF).
Supporting documentation for any claims, comparison, recommendations, statistics, or other technical data, will be supplied upon request.
When you purchase securities, you may pay for the securities in full, or if your account has been established as a margin account with the margin lending program, you may borrow part of the purchase price from Merrill. If you choose to borrow funds for your purchase, Merrill's collateral for the loan will be the securities purchased, other assets in your margin account, and your assets in any other accounts at Merrill. If the securities in your margin account decline in value, so does the value of the collateral supporting your loan, and, as a result, we can take action, such as to issue a margin call and/or sell securities in any of your accounts held with us, in order to maintain the required equity in your account. If your account has a Visa
® card and/or checks, you may also create a margin debit if your withdrawals (by Visa card, checks, preauthorized debits, FTS or other transfers) exceed the sum of any available free credit balances plus available money account balances (such as bank deposit balances or money market funds). Please refer to your account documents for more information.
Before opening a margin account, you should carefully review the terms governing margin loans. For Individual Investor Accounts, these terms are contained in the Margin Lending Program Client Agreement. For all other accounts, the terms are in your account agreement and disclosures. It is important that you fully understand the risks involved in using margin. These risks include the following:
- You can lose more funds than you deposit in the margin account. A decline in the value of securities that are bought on margin may require you to provide additional funds to us to avoid the forced sale of those securities or other securities in your account(s).
- We can force the sale of securities in your account(s). If the equity in your account falls below the maintenance margin requirements or Merrill's higher "house" requirements, we can sell the securities in any of your accounts held by us to cover the margin deficiency. You also will be responsible for any shortfall in the account after such as sale.
- We can sell your securities without contacting you. Some investors mistakenly believe that they must be contacted for a margin call to be valid, and that securities in their accounts cannot be liquidated to meet the call unless they are contacted first. This is not the case. We will attempt to notify you of margin calls, but we are not required to do so. Even if we have contacted you and provided a specific date by which you can meet a margin call, we can still take necessary steps to protect our financial interests, including immediately selling the securities without notice to you.
- You are not entitled to choose which securities in your account(s) are liquidated or sold to meet a margin call. Because the securities are collateral for the margin loan, we have the right to decide which security to sell in order to protect our interests.
- We can increase our "house" maintenance margin requirements at any time including on specific securities experiencing significant volatility and are not required to provide you advance written notice. These changes in our policy may take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause us to liquidate or sell securities in your account(s).
- You are not entitled to an extension of time on a margin call. While an extension of time to meet margin requirements may be available to you under certain conditions, you don't have a right to the extension.
If you have any questions or concerns about margin and the margin lending program, please contact the Merrill Investment Center at 855.332.5920.
The material was provided by a third party not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.
For purposes of all the computations discussed in this article, commissions, fees and margin interest and taxes, have not been included in the examples. These costs obviously will impact the outcome of any stock or option transaction. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities. Past performance is not a guarantee of future results.
This material is being provided for informational purposes only. Nothing herein is or should be construed as investment, legal or tax advice, a recommendation of any kind, a solicitation of clients, or an offer to sell or a solicitation of an offer to invest in options. The information herein has been obtained from third-party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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