Equities FAQs
Equity securities, or stocks, represent an ownership interest in a corporation. Trader Workstation offers trading of exchange-listed stocks, such as those traded on the New York Stock Exchange and the American Stock Exchange, and certain over-the-counter stocks, specifically, National Association of Securities Dealers ("Nasdaq") National Market Securities and SmallCap Securities. These stocks are deemed to be "marginable securities" by the United States Federal Reserve Board. Trader Workstation Customers may trade stocks in one of three accounts: (I) a "Stock Cash Account"; (II) a "Stock Margin Account; or (III) a combined "Stock and Options Margin Account". In a Cash Account, the Customer pays the full purchase price of the stock. In either of the two Margin Accounts, the Customer pays a portion of the purchase price (called "margin") and borrows the balance of the purchase price from Trader Workstation. The loan from Trader Workstation is secured by the securities purchased by the Customer. To establish a Margin Account, Customer must agree: (a) to repay to Trader Workstation the funds it borrows, with interest; and (b) that Trader Workstation may lend, pledge or hypothecate Customer's stock to facilitate Customer's margin transactions. Customer must also acknowledge that there is a higher potential for loss when purchasing stock on margin versus purchasing stock for cash.
Generally, investors purchase shares of stock if they believe the value of a company's stock will increase. Investors may purchase stocks either by paying the full cash price or by using margin. See How Margin for Securities Trading Works. Investors sell shares of stock to either liquidate a long position or to be short the stock. An investor may sell stock short if he anticipates a decline in the value of the stock. Short sale transactions involve the sale of stock that the investor does not own. Therefore, prior to effecting an order to sell a stock short for a customer, Trader Workstation is required to determine that it can borrow an equal amount of shares on behalf of Customer. For this reason, short sale transactions may take place only in a Margin Account since the customer must agree to allow Trader Workstation to borrow stock for Customer and pledge and hypothecate Customer's assets to facilitate the short sale transaction. If the stock Customer sold short rises in value and Customer is forced to buy the stock at the higher, current market price to cover the short sale the Customer may incur a loss on the trade. The potential loss on a short sale is unlimited since there is no limit to how high a stock can rise in price. Conversely, if the stock that was sold declines in price below the price at which the investor sold it, the investor can realize a profit by purchasing the stock at its current, lower price. In this case, Trader Workstation would return the borrowed shares to the lender. Short sellers may incur charges for the shares borrowed and are subject to unlimited loss.
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Equity options contracts represent the right, not the obligation, to assume a position in the underlying equity security at a specific price any time before the option expires. The equity options Trader Workstation makes available for trading are issued by The Options Clearing Corporation (OCC) and are traded on United States exchanges. Customers must, prior to placing their first equity options order, acknowledge to Trader Workstation that they have received and understand the OCC document "Characteristics and Risks of Standardized Options".
Equity options are expressed by their "symbol" followed by "expiration month" and "strike price", for example: "XYZ Oct1999 50 calls". They have standardized terms, for example, most option contracts represent 100 shares (the "contract multiplier") of the underlying stock and are issued 9 months in advance of their "expiration date" (the Saturday following the "last trading day" (usually the third Friday) of the expiration month). All options contracts covering XYZ stock are referred to as an "options class". The dollar value of a call or put equity options contract is the unit price of the option (called the "premium") x the contract multiplier (the number of underlying shares per option contract).
U.S. exchange-traded equity options are "physical delivery" options and are exercised "American Style", which means that they may be exercised for delivery of the underlying shares at any time until the expiration date. To participate in a voluntary corporate action, submit an Inquiry/Problem ticket via Account Management. To do this, go to Account Management and from the menu select Account Services, then select Corporate Actions. Prior to expiration, OCC will automatically exercise any long call or put option positions that are "in-the-money" by $0.01 or more. Exchanges impose position and exercise limits on the number of options contracts per side (call and put) and Customers must agree that they will comply with applicable law and not exceed such limits.
Equity options are typically used by investors who anticipate either an increase or decrease in the price of a certain stock to have the right, until the expiration of the option contract, to close out the option or exercise it and buy or sell the underlying stock at a predetermined price. In addition, investors may use options to hedge their long or short stock positions.
The buyer of a call or put option (known as the "holder") must pay the full premium of the option. The seller (known as the "writer") of a put or call option receives a premium upon selling the option and is required to meet margin requirements. See "Trader Workstation Margin Specifications for Equity Options". Trader Workstation Customers who buy a call or put option must have sufficient equity in their account to pay for the full purchase price of the option. Trader Workstation Customers who sell (or "write") equity options, must have sufficient equity in their account to meet Trader Workstation margin requirements.
There are a number of financial risks associated with trading options. It is beyond the scope of this section, or this website, to identify and fully discuss all of the risks associated with trading options. Trader Workstation does not provide investment, tax or other advice. Customers must consult with their professional advisors regarding investment strategies, tax implications and other implications, such as the risks, of trading options. Customers are also encouraged to view the websites of the various exchanges and the OCC, the OCC document "Characteristics and Risks of Standardized Options" and published material to obtain a full understanding of trading options and the risks involved. For an expanded discussion, please contact your advisor.
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For more information about options you can go to CK Locke & Partners Option information area here.
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Equity options contracts represent the right, not the obligation, to assume a position in the underlying equity security at a specific price any time before the option expires. All equity options contracts traded on a United States exchange are issued by The Options Clearing Corporation (OCC). Trader Workstation offers trading in OCC issued equity options. Investors who want to trade equity options must, prior to placing their first equity options order, acknowledge to their broker that they have received and understand the OCC document "Characteristics and Risks of Standardized Options".
Equity options available for trading through Trader Workstation have standardized terms, for example, most option contracts represent 100 shares (the "contract multiplier") of the underlying stock. Equity options are expressed by their "symbol" followed by "expiration month" and "strike price", for example: "XYZ Oct 1999 50 calls". All options contracts covering XYZ stock are referred to as an "options class". The dollar value of a call or put equity options contract is measured by the price of the option (called the "premium") x the contract multiplier (the number of underlying shares per equity options contract).
Equity options contracts are usually issued 9 months in advance of their "expiration date". The expiration date for equity options contracts is the Saturday following the "last trading day" for the option contract. The last trading day is usually the third Friday of the expiration month, except if the third Friday of the expiration month is a holiday, then the last trading day is the preceding Thursday.
U.S. exchange-traded equity options are "physical delivery" options. That is, the owner of a call option has the right, upon "exercise" prior to the time for expiration, to receive physical delivery of the underlying stock in return for payment of the "exercise price" and the owner of a put option has the right, upon exercise, to make delivery of the underlying stock in return for receipt of the exercise price. These options are exercised "American Style", which means that they may be exercised at any time between the date of purchase and the expiration date. "European Style" options may be exercised only on the expiration date. The expiration date is the last day that an option may be exercised.
If, at expiration, a Customer (1) desires to exercise a long option position that is in-the-money by less than $0.01, or (2) does not desire to exercise a long option position that is in-the-money by $0.01 or more, the Customer must provide Trader Workstation with a "contrary exercise notice" instruction using the Option Exercise window (accessTWSle from the TWS View menu) prior to 4:30 p.m. U.S. Eastern Standard Time on the last trading day (usually the third Friday of the expiration month, unless such Friday is a holiday, then the preceding Thursday) prior to the option's expiration date (Saturday). In the absence of "contrary exercise notice" instructions received from Customer prior to 4:30 p.m. U.S. Eastern Standard Time on the last trading day, at expiration Customer's long call or put options contracts which are "in-the-money" by $0.01 or more will be automatically exercised by OCC. For instructions on using the Option Exercise window, see the TWS User's Guide.
The implication of the expiration date to a buyer (holder) of call equity options contracts who does not close out an options position prior to expiration is that positions that are in-the-money by $0.01 or more will be automatically exercised by OCC and the holder will be long an equivalent number of shares. The implication of the expiration date to a seller (writer) of call equity options contracts who does not close out an options position prior to expiration is that the writer may be assigned, thereby obligating the call writer to deliver the number of shares represented by the options contracts at the exercise price.
The implication of the expiration date to a buyer (holder) of put equity options contracts who does not close out an options position prior to expiration is that positions that are in-the-money by $0.01 or more will be automatically exercised by OCC and the holder will be short an equivalent number of shares. The implication of the expiration date to a seller (writer) of put equity options contracts who does not close out an options position prior to expiration is that the put writer may be assigned, thereby obligating the put writer to purchase the number of shares represented by the options contracts at the exercise price.
Assume XYZ Oct 50 calls have a premium of $4.00. A buyer of 1 XYZ Oct call option contract would pay $400 ($4 x 100), and obtain the right, but not the obligation, to close out the contract by:
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selling 1 XYZ Oct 50 options contract prior to the contract's close of trading on the last trading day (the third Friday) of the contract expiration month (in this example, October);
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exercising the 1 XYZ Oct 50 options contract prior to its expiration;
Note A: In the absence of written "contrary exercise notice" instructions received from Customer prior to 4:30 p.m. U.S. Eastern Time on the last trading day, at expiration Customer's long call or put options contracts which are "in-the-money" by $0.01 or more will be automatically exercised by OCC.
Note B: In the above example, if the call had not been closed out through either a sale or exercise, or if the call was not automatically exercised by OCC because it was out-of-the-money, or in-the-money, by less than $0.01, the call will expire and the buyer of the call would lose the $400 paid for the contract.
Assume XYZ Oct 50 calls have a premium of $4.00. A seller (known as the "writer") of 1 XYZ Oct call option contract would receive a premium of $400 ($4 x 100), and may close out the contract by buying 1 XYZ Oct 50 call option contract prior to expiration. However, prior to closing out the contract, the call writer is obligated to deliver the underlying shares if he is assigned.
Note: In the above example, if at expiration the call is in-the-money by $0.01 or more, OCC will automatically exercise the call, obligating the call writer to deliver the number of shares represented by the options contracts. If the call was not automatically exercised by OCC because it was out-of-the-money, or in-the-money, by less than $0.01, the call will expire and the call writer will have profited by the $400 received when the call was written.
Trader Workstation does not provide investment, tax, or other advice. Trader Workstation Customers make their own trading decisions and must consult with their independent advisors, if necessary. Investors who anticipate either an increase or decrease in the price of a certain stock, may buy equity options contracts to have the right, until the expiration of the option contract, to buy or sell that stock at a predetermined price. A call option provides an investor with the right, but not the obligation, to buy shares of the underlying equity security at a fixed price, known as the "strike price". A put option provides an investor with the right, but not the obligation, to sell shares of the underlying equity security at the strike price. Strike prices for equity options are generally set at 5 point intervals and may be added for trading as the price of the underlying stock moves toward either end of the range of listed strike prices for that option. In addition, investors may use options to help hedge their long or short stock positions.
The buyer of an option is called the "holder". The seller of an option is called the "writer". An option is "at-the-money" when its strike price equals the market price of the underlying stock. A call option is "in-the-money" when its strike price is less than the market price of the underlying stock and "out-of-the-money" when its strike price exceeds the price of the underlying stock. A put option is "in-the-money" when its strike price exceeds the market price of the underlying stock and "out-of-the-money" when its strike price is less than the price of the underlying stock.
If Customer has sold (or "written") a call option, Customer will be obligated to sell the underlying stock at the exercise price of the option if Customer is "assigned". An assignment occurs when the call option is exercised, either by the holder or automatically at expiration if the option is in-the-money by $0.01 or more. Call options are generally exercised when they are in-the-money. If assigned pursuant to an exercise, the writer of a put option will be obligated to buy the underlying stock at the exercise price of the option, while the writer of a call option will be obligated to deliver the underlying stock at the exercise price of the option. Customers who have sold ("written") options can anticipate being "assigned" at anytime, especially if the option is "in-the-money" Customers must be aware that OCC will automatically exercise any option that is in-the-money by $0.01 or more at expiration.
In contrast to the buyer (holder) of a long option position, who must pay the full purchase price of the option, an option writer is subject to margin requirements. An uncovered ("naked") call writer is one who does not have an equivalent long position in the underlying stock represented by the option contract. An uncovered put writer is one who does not have a corresponding short position in the underlying security.
Trader Workstation requires option writers to meet initial and maintenance margin requirements in their Stock & Options Margin Account as set forth on the "Trader Workstation Margin Specifications for Equity Options" page. TWS Customers who buy a call or put option must have sufficient equity in their account to pay for the full purchase price of the option. TWS Customers who sell (or "write") equity options, must have sufficient equity in their account to meet the initial margin requirements of the resulting position.
Exchanges impose position limits on the number of options contracts per side (call and put) that a person may hold. Trader Workstation Customers agree in the Customer Agreement not to exceed the position limits imposed by applicable law. Customers will incur a commission for opening and closing transactions, as well as for exercises and assignments. Trader Workstation does not provide investment, tax or other advice. Customers must consult with their professional advisors regarding investment strategies and tax and other implications of trading options.
The following highlights certain of the risks associated with options trading, but does not cover all of the risks, nor does it discuss such risks in detail. Customers are encouraged to consult with their investment advisors, the websites of the various exchanges, the OCC document "Characteristics and Risks of Standardized Options" and published material to gain a fuller and better understanding of both trading options and the risks involved. Options involve risk and are not suitable for all investors. For information on the uses and risks of options, you can obtain a copy of the Options Clearing Corporation risk disclosure document titled Characteristics and Risks of Standardized Options from Mr. John Seeberg, Trader Workstation LLC, 1 Pickwick Plaza, Greenwich, Connecticut 06830 or by calling (203) 618-5800.
Identification of all the general risks which affect options trading, and a discussion of them, is beyond the scope of this section but they include: the trading of the underlying stocks (e.g. trading halts), economic factors (e.g., news releases), supply and demand, volatility, liquidity, the quality of the markets, electronic systems and regulatory requirements.
One risk factor that Trader Workstation Customers face is the unavailability, for any reason, of the TWS System which, in part, relies on facilities of third parties. For this reason, TWS Customers must maintain alternative arrangements for the execution of their orders, or the transmission of their exercise instructions since there will be periods of time that the TWS System is unavailable, and TWS will not be liable to Customer since it does not warrant the performance of its system at all times.
While all of the risks specific to certain option holders and writers cannot be identified, nor discussed in detail, they include:
- Unlike one who buys stock, in order to profit, the buyer of a call or put option must be correct as to the anticipated direction of the price of the stock and timing prior to the expiration of the option. As a result, option holders risk losing all or a portion of their investment in the option if:
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the underlying stock does not move as anticipated; as the option becomes more out-of-the-money and the time to expiration shortens;
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courts or regulators impose exercise restrictions, or halts of trading in the underlying stocks, in which case, holders may lose all or a portion of their investment.
Option Writers - The seller (writer) of an American Style option may be assigned at any time. In fact, an option writer may be assigned (obligating the call writer to deliver stock, or the put writer to buy stock) and not learn of the assignment until one or more days later. If, prior to receiving notice of the assignment, the writer enters into a closing transaction (by purchasing an equivalent number of calls or puts, as the case may be), the writer will be obligated to buy or deliver the underlying stock and the closing transaction will be treated as an opening transaction. The amount of loss depends on whether the option writer is "covered" or "uncovered".
Covered call writers give up the opportunity to benefit from an increase in the price of the underlying stock above the strike price, and are at risk for a loss resulting from a decrease in the price of the underlying stock. The decrease in the price of the underlying stock may be wholly or partially offset by the premium the writer received when it sold the call.
Uncovered call writers are exposed to potentially unlimited risk since there is no limit to which the price of the stock they may be obligated to deliver can rise. These losses may be compounded by the margin requirements the uncovered call writer is obligated to meet. Accordingly, uncovered call writing is only suitable for the knowledgeable investor who understands the risks, has the financial capacity and willingness to incur potentially substantial losses, and has sufficient liquid assets to meet applicable margin requirements.
Uncovered put writers bear the risk of loss if the underlying stock declines below the option's strike price and their potential loss is the difference between the exercise price and zero. The put writer is exposed to the additional risk of meeting the margin obligation to maintain the position.
Uncovered option writers can enter into a spread transaction (by purchasing other options on the same underlying stock) or by hedging their position with other types of instruments. The risks attendant to such positions are discussed below.
While uncovered option writers use leverage to help control an equivalent position as an investor for the underlying stock, and thereby increase the potential for greater profit, at the same time they are exposed to greater risk and the potential for greater loss than those who carry positions in underlying stock.
Option writers are not only exposed to the risk of being assigned, and thereby obligated to perform, they may not receive immediate notice of an assignment, enter into a closing transaction, and later learn of the assignment. This will obligate them to perform and transfer their closing position into an open position. Events such as tender offers and exchange offers further complicate, affect the ability to perform, and may increase the cost and risk of loss to, option writers.
Option writers may be assigned pursuant to improper exercise notices- for example, a holder may submit an exercise notice after the time for doing so and OCC will be obligated to assign the notice even though it later turns out the exercise was improper.
If trading or other conditions (for example, electronic systems communications failure) prevent an option writer from closing out a position, the option writer is exposed to its obligations until assignment or expiration.
Option traders who engage in spread or straddle transactions are exposed to the complexity of the transaction itself; and the risk that one side of the spread or straddle transaction becomes assigned, thereby exposing the writer to the obligations of performance and reducing the intended hedge such combination transaction was intended to create. Other risks include not being able to simultaneously enter into the other side of the spread or straddle transaction, thereby altering the intended effect, or profitability of the transaction; the possTWSility of loss for both sides of the transaction; and the increased transaction costs. In a short straddle transaction, where both a call and put option are written with the same exercise price, there is the potential for unlimited loss. Please note that multi-leg strategies incur multiple commission charges.
The following "Special Statement for Uncovered Option Writers" highlights risks for uncovered option writers:
There are special risks associated with uncovered option writing which expose the investor to potentially significant loss. Therefore, this type of strategy may not be suitable for all customers approved for options transactions.
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The potential loss of uncovered call writing is unlimited. The writer of an uncovered call is in an extremely risky position, and may incur large losses if the value of the underlying instrument increases above the exercise price.
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As with writing uncovered calls, the risk of writing uncovered put options is substantial. The writer of an uncovered put option bears a risk of loss if the value of the underlying instrument declines below the exercise price. Such loss could be substantial if there is a significant decline in the value of the underlying instrument.
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Uncovered option writing is thus suitable only for the knowledgeable investor who understands the risks, has the financial capacity and willingness to incur potentially substantial losses, and has sufficient liquid assets to meet applicable margin requirements. In this regard, if the value of the underlying instrument moves against an uncovered writer's options position, the investor's broker may request significant additional margin payments. If an investor does not make such margin payments, the broker may liquidate stock or options positions in the investor's account, with little or no prior notice in accordance with the investor's margin agreement.
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For combination writing, where the investor writes both a put and a call on the same underlying instrument, the potential risk is unlimited.
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If a secondary market in options were to become unavailable, investors could not engage in closing transactions, and an option writer would remain obligated until expiration or assignment.
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The writer of an American-style option is subject to being assigned an exercise at any time after he has written the option until the option expires. By contrast, the writer of a European-style option is subject to exercise assignment only during the exercise period.
NOTE: It is expected that you will read the booklet entitled CHARACTERISTICS AND RISKS OF STANDARDIZED OPTIONS available from your broker. In particular your attention is directed to the chapter entitled Risks of Buying and Writing Options. This statement is not intended to enumerate all of the risks entailed in writing uncovered options.
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Stock may be purchased in one of two ways. One way is to pay the purchase price in full (called a "cash transaction"). Another way is to buy the stock on margin, that is, by paying a portion of the purchase price (called "initial margin") and borrowing the balance from a broker (called a "margin transaction"). Margin transactions effected in an Trader Workstation Margin Account are subject to United States Federal Reserve Board Regulation T and New York Stock Exchange ("NYSE") initial and maintenance margin requirements. In addition, Trader Workstation may at any time and without notice to Customer: (a) impose higher initial or maintenance margin requirements than those imposed by the NYSE; (b) determine that a particular stock may not be purchased on margin; or (c) automatically liquidate a Customer's margined position.
Trader Workstation will generally require initial margin for a purchase of stock on margin to be equal in amount to the greater of: (a) that required by the U.S. Federal Reserve Board, currently 50%, or (b) that required by the NYSE, currently $2,000, unless the full purchase price of the stock is less than $2,000, then the full purchase price. However, Trader Workstation may require a higher amount of initial margin for any particular margin transaction.
The following section: (A) defines certain terms as they are applied under Trader Workstation' Rules for Trading Securities on Margin; (B) sets forth Trader Workstation' Rules for Trading Securities on Margin; and (C) provides several examples to illustrate trading on margin in an Trader Workstation securities margin account.
Equity equals the current market value of all (a) available funds plus (b) long stock and options positions carried in an Trader Workstation securities Cash Account or Margin Account, less (c) short stock and options positions carried in an TWS securities Margin Account, (d) the amount borrowed, (e) the interest incurred on the amount borrowed and (f) commissions and fees.
Initial margin represents the initial payment required for a margin transaction. It also represents the initial equity Customer has in a particular stock since the balance of the payment for such stock is made with funds Customer borrows from, and owes (with interest), to Trader Workstation.
Liquidation amount is that amount of Customer's position that the Trader Workstation system, pursuant to a proprietary algorithm, will automatically liquidate at the point at which the equity in Customer's account falls below Trader Workstation' minimum maintenance margin requirement. The Trader Workstation system is designed to liquidate Customer's most recent transactions in 100 share and 1-option contract increments, or such amount of shares or option contracts held by customer that, following liquidation, will provide the account with equity in excess of Trader Workstation' minimum maintenance margin requirement at the time of liquidation.
Minimum maintenance margin is the amount of available funds an Trader Workstation Customer is required to have in an Trader Workstation securities margin account to maintain, and prevent an automatic liquidation of, a margined securities position. Trader Workstation' minimum maintenance margin requirement will be based on the New York Stock Exchange's minimum maintenance margin requirement, as follows:
For stock purchased on margin - currently 30% of the current market value of the long securities position. Trader Workstation requires $2,000 minimum account equity for all margin transactions.
For stock sold short - 30% for underlying stock priced $17.00 per share or more; or $5.00 per share for stock priced between $5.00 and $16 7/8 per share; or, for stock priced less than $5.00 per share, the greater of 100% or $2.50 per share. Trader Workstation requires $2,000 minimum account equity for all margin transactions.
However, the amount of minimum maintenance margin required for a particular margin transaction may, at any time and without notice to Customer, be higher. This means that if Trader Workstation decides to increase the minimum maintenance margin requirement for a particular stock, or in general, and Customer does not have sufficient available funds in an Trader Workstation securities account, Trader Workstation may automatically liquidate all, or a portion of, any Customer position(s) sufficient in amount to meet Trader Workstation' minimum maintenance margin requirement.
Customers must acknowledge that Trader Workstation':
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System is designed to automatically liquidate Customer's most recent transactions in 100 share and 1-option contract increments, or such lesser amount of shares or option contracts held by Customer, for a margined securities position if the Customer does not have enough equity in an Trader Workstation securities account to satisfy Trader Workstation' minimum maintenance margin requirement;
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Minimum maintenance margin requirements are subject to change at any time without notice to customer;
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Trader Workstation' policy is to not issue intra-day margin calls to Customers; and,
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Customers must monitor their securities accounts to ensure they have sufficient available funds to, at all times, satisfy Trader Workstation' minimum maintenance margin requirements.
Customers must also understand that although the use of margin enables you to leverage an investment - since you put up only a portion of the purchase price and borrow the remainder, thereby increasing your purchasing power - it also increases the potential for higher losses because you are liable for both the full purchase price plus interest charges on the amount you borrow. In addition, you may be forced to liquidate your margined position prior to the time you want to in order to meet maintenance margin requirements. Keep in mind that Customer positions maintained in an Trader Workstation securities margin account are subject to automatic liquidation if the market value of a margined position decreases in value below Trader Workstation' minimum margin maintenance requirement.
The following examples demonstrate the use of margin in an Trader Workstation securities margin account. The following examples are for illustration purposes only and are not meant to encompass a wide variety of situations. (Note: for simplicity, the examples ignore commissions and fees and the amount of daily interest incurred on the borrowed amount, each of which is deducted from the equity in Customer s account):
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Customer buys $100,000 worth of stock. Trader Workstation initial margin requirement is 50%. If Customer has $50,000 in available funds in its Trader Workstation securities Margin Account, Trader Workstation will deduct such amount from Customer s account as initial margin toward the purchase of the securities and provide Customer with an interest-bearing margin loan in the amount of $50,000. As a result, Customer's equity in the margin account is $50,000 (less commissions), and Customer has received a margin loan of $50,000 from Trader Workstation. Assume that on Day 2 the market value of the securities falls to $71,427. Under this scenario, the customer's margin loan from the firm would remain at $50,000, and the customer's account equity would fall to $21,427 ($71,427 market value less $50,000 loan amount). However, since Trader Workstation' minimum maintenance margin requirement is 30%, meaning that the customer's equity must not fall below $21,428 ($71,427 market value multiplied by 30%), Trader Workstation will automatically liquidate a portion of Customer's margined position, without notice to the customer and without providing the customer an opportunity to deposit additional funds. Since Trader Workstation requires that a Customer, following an automatic liquidation, have available funds equal to Trader Workstation' minimum margin maintenance requirement at the time of liquidation, Trader Workstation will attempt to automatically liquidate in 100 share increments an amount of stock that, following the automatic liquidation, will provide Customer's account with equity which exceeds Trader Workstation' minimum maintenance margin requirement at the time of liquidation.
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Customer places an order to sell 10,000 shares of XYZ stock short at a time when the price of XYZ stock is bid $10 per share, or a current market value of $100,000. Prior to effecting a short sale order for a Customer, (a) the Customer must have equity in its account at least equal to the TWS's initial margin requirement and (b) Trader Workstation must be able to borrow the stock on behalf of Customer. Trader Workstation will determine whether it can borrow the 10,000 shares of XYZ stock. If it cannot borrow 10,000 shares of XYZ stock, Trader Workstation will not effect the short sale. If it can arrange to borrow 10,000 shares of XYZ stock, Trader Workstation will attempt to execute the short sale of XYZ stock and borrow 10,000 shares of XYZ stock for Customer. Assume that Trader Workstation initial margin requirement for a short sale is 50% and its minimum maintenance requirement for a short sale is (a) 30% for underlying stock priced $17.00 per share or more; or $5.00 per share for stock priced between $5.00 and 16 7/8 per share; or, for stock priced less than $5.00 per share, the greater of 100% or $2.50 per share. Trader Workstation will not attempt to effect the short sale unless Customer has equity in an Trader Workstation securities account of at least $50,000. Assuming Customer has account equity of $50,000, prior to placing the short sale order, following execution the Customer's account will be credited with the proceeds from the short sale, $100,000, bringing the cash balance to $150,000 (less commissions and fees). The account equity remains at $50,000 ($150,000 cash balance less $100,000 value of short stock position). However, if XYZ stock rises in value to any amount above $116,000 (at which point the customer's equity ($34,000) will fall short of the 30% minimum maintenance requirement) Trader Workstation will attempt to automatically liquidate in 100 share increments an amount of stock that, following the automatic liquidation, will provide Customer's account with equity which exceeds Trader Workstation' minimum maintenance margin requirement at the time of liquidation.
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