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If I short AAPL at 500$, how much can the stock rise before I get a margin call?
Does it depend on how much Cash/Equity in other stocks I hold in my margin account? I just thought that if margin requirement for AAPL is 50% (say), then the stock must rise 50% from 500 $ before I get a margin call.
But obviously this is wrong and the calculation is more calculated.
I read this overview on IB but somehow it does not help me understand the margin call requirements. It is very confusing to me.
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:
P_m = P_i * ( 1 - m_i ) / ( 1 - m_m )
and for a short
P_m = P_i * ( 1 - m_m ) / ( 1 - m_i )
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.