What to do when you get a margin call?

[futurecurrents]

Quote from jaredand:



To you and Lobster,

A lot of successful traders get margin calls. You obviously have only been exposed to guys who have gotten blown out. Many traders maximize their leverage for daytrading purposes. You don't have to keep your entire networth in your trading account especially when its only getting .75% interest. You get a margin call - you meet it by moving your money from your (higher) interest bearing account. Its actually a SMART thing for successful traders to do. A smart trader should also learn how to manage their assets.

OK, perhaps I was too flippant. I got margin calls in the past from using a buy and hold philosophy. I poured more and more into the position and watched it all go bye-bye. The mention of margin calls still makes me twitch and mumble. Of course this was just due to stupidity and hubris combined with margin. But from that time forward I've only daytraded and never held overnight, eliminating the possibility of one those........ those things, and I'm a much calmer and better trader for it.

******************************

Quit now, you'll never make it. If you disregard this advice,
you'll be halfway there.
David Zucker

 

[Rigel]

First you risk your own money, then you risk someone elses money (margin), then your credit runs out and you need to come up with more money. The situation has loser written all over it IMO, unless the margin call comes in an a small side account that you can easily cover, and even then it's sort of the same thing as having a check bounce. Doesn't look good. Sloppy. You haven't handled your risk so someone else forces you to take care of it. Puts you in a weak position. That's the way I feel about it anyway.

 

[TGregg]

Good grief. If I ever got a margin call, I'd close out all my positions, shut my computer off, disconnect the net and sit down with a bottle of Beam to figure out just what had happened to me. Then I'd have to figure out what to do with my life, cuz I'd also probably be too afraid to trade again.

Frequently I seem to be less cautious than the average EliteTrader member. Then I run across a thread like this, and I once again realize there are probably as many ways to trade as there are traders. So, I'm not realy being critical of anybody who gets margin calls, just saying that is it clearly not a part of my trading.

 

[mrktwiz]

........I remember "back in the day" I was trading the futures (T-bonds options) and we were running a deltal neutral strategy and just letting volitility move the contracts into a profitable situation ...when I get thsi call from my broker....uh you have a margin call John.........I said " whats that?"...he explained....my response was to write him a LARGE check....then ask him how our position went so far against us w/o him re-adjusting our position, he didn't have a good answer...I started handling my own trading myself after that.....

..........."lessons learned that hard way"...could be another title for this string...

John

 

[FanOfFridays]

jaredand, you said that margin calls can be met. You probably have WAY more experience than me, but wouldn't 8 out of 10 veterans would say that 90% of the time, you should NOT meet the call - instead, fold the position, take the loss, then sit back and figure out which tactical mistakes you made? (kind of like what TGregg suggests above, but with a strong comeback )

This situation has come up for some of the traders in the 'Market WIzards' books, and in other interviews I have read. They usually say that they liquidate or are liquidated , the markets turn and they would have been fine, but they STILL feel they did the right thing. Your thoughts? I am thinking primarily of beginning traders who find themselves in margin calls because of bad planning.

EDIT - in re-reading your post, it seems that you are probably referring to a specific situation for daytraders who want to do better than the .75% available on their daytrading accounts. These must be high volume trades, because I assume the idea is that you put a trade on without enough capital in the account to cover your maximum acceptable drawdown for that trade, because that amount (i.e. 2-3% of total capital, a commonly used figure) is so high that the lost interest is relevant.

 

[jaredand]

Quote from nik:

jaredand, you said that margin calls can be met. You probably have WAY more experience than me, but wouldn't 8 out of 10 veterans would say that 90% of the time, you should NOT meet the call - instead, fold the position, take the loss, then sit back and figure out which tactical mistakes you made? (kind of like what TGregg suggests above, but with a strong comeback )

This situation has come up for some of the traders in the 'Market WIzards' books, and in other interviews I have read. They usually say that they liquidate or are liquidated , the markets turn and they would have been fine, but they STILL feel they did the right thing. Your thoughts? I am thinking primarily of beginning traders who find themselves in margin calls because of bad planning.

EDIT - in re-reading your post, it seems that you are probably referring to a specific situation for daytraders who want to do better than the .75% available on their daytrading accounts. These must be high volume trades, because I assume the idea is that you put a trade on without enough capital in the account to cover your maximum acceptable drawdown for that trade, because that amount (i.e. 2-3% of total capital, a commonly used figure) is so high that the lost interest is relevant.

Yes, I am referring to experienced traders. I was just commenting because someone make a blanket statement about margin calls. As long as you manage your assets properly, margin calls are not always negative. Also, I was referring to mostly day traders who go out flat every night so closing positions by the end of day is already a practice. There is no interest charged on intraday margin (4 to 1).

 

[stockerup]

Quote from tampa:

I just got ANOTHER one Friday, and wanted to see how other successful traders handle it.

Your poll sounds cute but the realism of the matter is that you will have to settle up on the call. In my opinion the best thing to do is to sell and cover the call--never put more money into the position. If the loss is big enough, as was my last and only margin call, you will never forget it, and it will keep you from ever getting caught like that again.

 

[thetraderprofit]

Since I went from prop to retail, I get margin calls. I don't consider it a big deal. I meet every call. The wire fees do add up over the year, though.

I don't think a call indicates there's something wrong with your trading or that you are overleveraged. After all, you shouldn't have all your money in your trading account.

As to kicking back with a bottle of Beam as one writer suggested, you can do this without a margin call. In fact, if you can't meet the call, I think Xanax or Valium would be a better choice.

 

[jaredand]

Quote from thetraderprofit:

Since I went from prop to retail, I get margin calls. I don't consider it a big deal. I meet every call. The wire fees do add up over the year, though.

I don't think a call indicates there's something wrong with your trading or that you are overleveraged. After all, you shouldn't have all your money in your trading account.

As to kicking back with a bottle of Beam as one writer suggested, you can do this without a margin call. In fact, if you can't meet the call, I think Xanax or Valium would be a better choice.

Good point, its not whether you get a margin call but whether you can cover it or not without being overleveraged.

 

[vladiator]

Hey guys. I have asked this question before in a different thread but never got a good answer. Seems like this thread is perfectly suited for it. Let's say there is a stock that plummets like a rock on some day, close-to-close, say El Paso, or one of those big cap losers. Many traders who got caught long will probably get margin calls. Don't some firms just liquidate the positions automatically when that happens? Also, when exactly would that be? Close to the end of the day of a big decline? Early after the open next day? The reason I'm asking is b/c there might be some arb opportunities that present themselves if those liquidations are more or less systematic.
Thanks a bunch.