The policy#

Real-money positions are long-only and fully paid.

You own the thing. The most you can lose is what you paid.

That rule exists because of one number.

Start with last week’s position#

610 units of B at $18.00  =  $10,980

Your own money.

Now borrow the same again#

1,220 units at $18.00  =  $21,960

   your money          =  $10,980
   borrowed            =  $10,980

Your equity#

What is left after repaying the loan:

equity  =  1,220P − $10,980

At $18.00 that is $10,980. As it should be.

The lender is watching one number#

Maintenance margin. Keep equity above some

fraction of the position’s value, or it is closed for you.

Take 25%.

Solve for the price#

(1,220P − 10,980) / 1,220P  =  0.25

     1,220P − 10,980        =  305P

                     915P   =  10,980

Not a price you chose#

Not a price you were warned about.

Not a price at which you have any say.

Three inputs, one of them a fraction in a document you did not read.

Now suppose B does this#

$18.00  →  $11.50  →  $14.00

Unleveraged#

You hold 610 units the whole way.

610 × $14.00  =  $8,540

Down. And still holding.

Leveraged#

Closed out at $12.00 on the way down.

1,220 × $12.00 − $10,980  =  $3,660

The move from $12 to $14 happened to somebody else.

But you would have guessed#

B fell 22.2%. Twice the exposure, twice the loss:

$10,980 × (1 − 2 × 0.222)  =  $6,101

You have $3,660.

It happens without borrowing too#

0.50 × 1.50  =  0.75

Down 25% after two moves that sound like they cancel.

To get back from 0.50 to 1.00 the price needs +100%, not +50%.

And if B keeps falling#

1,220P  =  $10,980   →   P = $9.00

At $9.00 your equity is zero.

At $8.00#

position   1,220 × $8.00  =   $9,760
loan                      =  $10,980
                             ─────────
you owe                        $1,220

On top of having lost everything you put in.

Unleveraged, at $9.00#

610 × $9.00  =  $5,490

A bad week. And yours.