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I am trying to tippy toe into volatility trading and volatility strategies.

So I was reading Sheldon Natenberg where he starts off with a portfolio of long ATM call and short 50 shares of stock to set up a delta neutral position.

Now if stock goes up (let us say 5%), he shorts additional shares to become delta neutral again.

My question is, how do margin calls feature into this? if the stock goes up a certain amount, my initial short position is in risk of margin call(being auto liquidated). This risk becomes increasingly prominent as I keep selling all the way up, to maintain my flat position.How can I factor in this risk while evaluating this strategy?

Let us assume that both initial and maintenance margin is 30% and I utilized maximum margin while opening the trade.

  • a margin call does not "liquidate your trade" it means that you have to post more margin against the security as the margin requirement has risen – MD-Tech Apr 8 '15 at 14:16
  • Broker dependent. Interactive brokers don't call you, they just close positions if they violate maintenance margin. – Victor123 Apr 8 '15 at 14:17
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    you're forgetting your calls would increase in price somewhat as you lose money on your shorts. should offset some of your "losses" on the short side preventing a margin call. – Knuckle-Dragger Apr 8 '15 at 20:23
  • Yes, you are right, I did not think of that. – Victor123 Apr 8 '15 at 20:44
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    Have a read here, might explain things better. Then lookup 'UCO' stock for the past 30 days. Would have been a great gamma play. randomwalktrading.com/practical-gamma-scalping – Knuckle-Dragger Apr 8 '15 at 21:22

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