Margin level is a risk-management indicator that helps you understand what influence the currently opened positions have on your account.
The margin level in your options trading account is a formula that tells you how much of your funds are available to open new trades. The higher your margin level percentage, the more funds are available to trade. If the margin level drops too low, you could receive a margin call.
What Is Margin Level?
Your margin level percentage is a measure of the relationship between the equity in your trading account and how much margin is in use. The margin level calculation is expressed as a percentage: (equity / margin) x 100.
It’s helpful to think of margin level as a reading of your trading account’s health. A margin level percentage of 0% means you have no open positions. A margin level of 100% means that the amount of a portfolio’s equity and used margin are equal. Equity is the cash available to trade, plus any unrealized profits and losses on open positions. Many brokers will not allow investors to make new opening trades when the margin level on their options trading account is 100% or less.
When margin level falls below 100%, the broker might issue a margin call. Unless the market moves back in your favor, you must deposit more funds (or assets) into your account when you are hit with a margin call. You can also satisfy a margin call by exiting your current holdings.
The margin level percentage depends on various factors. The volume of your positions and their potential effect on the market can affect your margin level calculation; as can the amount of leverage you use.
What Does Margin Level Really Do?
To understand what margin level means, it’s important first to grasp the concept of margin in options trading.
Margin is the amount of cash or securities a trader must deposit in their account before being able to write (or sell) options. You can think of it as a good faith deposit or a form of collateral.
The Federal Reserve Board’s Reg T sets margin requirements. Margin works differently in options and futures accounts than in stock trading accounts. Margin debt in stock trading refers to the amount of borrowed funds used to buy new shares. This is also referred to as using leverage.
The margin level calculation tells you how much of your funds are available to use for new opening trades. The higher your margin level, the more “free margin” you have. Free margin is the amount of money available to place new trades. Margin is composed of “used” and “free” amounts. Used margin is the aggregate of all the required margin on your existing positions. Free margin, on the other hand, is the difference between equity and used margin.
Margin level also can inform you of how much wiggle room you have in your options trading account, or other types of accounts. A very high margin level percentage means you have a large amount of equity relative to the total amount of required margin. A low margin level calculation tells you that your account might not be far from getting a margin call.
Increase your buying power with a margin loan from SoFi.
Borrow against your current investments at just 8.50%* and start margin trading.
*For full margin details, see terms.
Calculating Margin Level
Calculating margin level is straightforward: Divide the equity by the amount of used margin; then multiple that quotient by 100:
Margin level = (equity / margin) x 100
If you don’t have any open positions, then your margin level calculation will be zero. This can be confusing because usually, a low margin level means your account might be at risk for a margin call. A 0% margin level is the safest and lowest-risk margin level you can have, because in that scenario, you’d have no open positions.
Margin level = (equity / margin) x 100
Margin Level Example
Suppose you deposit $10,000 into your account. Before you make any trades, your margin level is 0%, as you don’t have any used margin (the divisor in the earlier-mentioned equation is zero). Your first buy is a call option on shares of XYZ stock, and you pay a $5,000 premium. Your margin level calculation is now 200% ($10,000 / $5,000 = 200%).
Now let’s say you open another $5,000 options position. Your margin level declines to 100% ($10,000 / $10,000 = 100%). We will assume that is the broker’s minimum margin level before a margin call is issued. Later, we’ll detail what happens if your margin level falls below the critical 100% threshold.
Why Understanding Margin Level Is Important
The margin level percentage is important, as brokers use this figure to determine whether you can open new positions. Many brokerage firms set a minimum margin percentage at 100%. So if your margin percentage drops below that threshold, then you will encounter a margin call — or even a forced liquidation — on one or more of your open trades. If you want to take on new positions, then you’d be forced to sell an existing holding or add more funds to your account.
Margin Level Below 100%
Taking our earlier example a step further, If the market moves against you, and your option values fall to $9,000 on the market, your margin level calculation would decline to below the minimum margin level ($9,000 / $10,000 = 90%). The broker then would issue a margin call. You have two choices: either sell an existing position or deposit more assets into the account. If you do not act promptly, the broker can sell one of your positions automatically.
Your margin level could fall below 100% based on small moves in the assets you own. Broad market conditions, like volatility, also could affect your account negatively. In an extreme example, Silver Thursday rocked the silver trading market and caused long futures and options positions on silver to suffer severe losses. In turn, this triggered an onslaught of margin calls in the precious metals markets. The moral of the story: It’s important to manage risks carefully when using leverage.
If you’re interested in trading on margin, or just want to know more about it, you’ll need to understand the difference between marginable and non-marginable securities.
SoFi now offers margin trading!
Trading on margin is an advanced strategy that comes with greater risk than trading other securities, like stocks or ETFs, for example. But while the risks are greater, so are the potential rewards (and losses).
For experienced traders, using margin can enhance buying power. No need to pass on a good deal because you’re waiting for cash to transfer into your account.
If you have the experience and the risk tolerance to try out trading on margin, SoFi can help. With a SoFi margin account, you can increase your buying power, take advantage of more investment opportunities, and potentially increase your returns.
What is free margin and how is it connected to margin level?
Free margin is the amount of money that is not reserved for existing holdings. You can use free margin to open new positions. Free margin is connected to your margin level in that the higher your margin level calculation, the more free margin you have available to trade.
What does 100% margin level mean?
A 100% margin level percentage is hit when your equity is equal to your margin used. Most brokers set a margin level limit at 100%. If your equity falls below this limit, you might be hit with a margin call. When your margin level drops below the minimum margin level, you cannot open further new trades.
What is the minimum margin level?
The minimum margin level is the equity percentage set by a broker that is required to be maintained by options, futures, and forex traders. If your margin level percentage falls below this level, you might face a margin call.
In stock trading, the minimum margin level is set by FINRA at $2,000 or 100% of the purchase price of the margin securities, whichever is less. Some firms may require a larger deposit. You can learn about marginable and non-marginable securities on SoFi Invest.
Photo credit: iStock/fizkes
*Borrow at 8.50%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.