Why You Should Use Implied Volatility to Buy and Sell Options
How is Buying Power Determined?
The calculation of stock buying power is the lesser of Special Memorandum Account (SMA) multiplied by two or maintenance excess divided by 30%, unless the security has special margin requirements.
What is SMA?
The Special Memorandum Account (SMA), is a line of credit that is created when the market value of securities held in a Regulation T margin account appreciate.
The objective of this account is to maintain the buying power that unrealized gains create towards future purchases without creating unnecessary funding transactions.
Without SMA, an account would have to withdraw excess equity and redeposit it at the time of the account’s next purchase.
How does SMA change?
The SMA account increases as the value of the securities in the account appreciate, but does not decrease when the value of those securities depreciates. However, SMA can only appreciate when account’s equity percentage is 50% or greater. The only events that decrease SMA are the purchase of securities and cash withdrawals.
Below is a list of events that will impact your SMA:
*Margin Interest and appreciation/depreciation of non-marginable securities do not have any impact on SMA.
Maintenance excess, also known as house surplus, is the amount by which your margin equity exceeds the total maintenance requirements for all positions held in your account.
Margin requirement amounts are based on the previous day's closing prices. Maintenance excess applies only to accounts enabled for margin trading.
If applicable, you can view this figure under "Margin equity" in the "Margin" section on the displayed page.
Client opens account and deposits $10,000 into their TD Ameritrade margin account, the account ledger would look like the following.
Client Purchases $10,000 of ABC Corp.
ABC position appreciates to $12,000
ABC depreciates to $5,000
*Because Maintenance excess is less than SMA it determines buying power in this example
ABC appreciates to $10,000
Client sells ABC position for $10,000
*In this example, Maintenance Excess determines the funds available for trading.
However, SMA multiplied by 2 is less than Maintenance excess divide by 30% so SMA is determining Stock Buying Power.
How much stock can I buy?
Generally, an account that is not breaching concentration requirements, can determine how much stock they can purchase by dividing their Funds Available for Trading (Option BP on thinkorswim) by the securities margin requirement.
Client has the following buying power available:
Client wishes to purchase the maximum amount of ABC Corp.
ABC Corp has a 30% margin requirement.
$16,300/30% = $54333.33
In this case the client could purchase $54,333.33 of ABC Corp.
The client decides not to purchase ABC, but would rather own XYZ which has a 40% margin requirement.
$16300/40% = $40,750
In this case, the same client, would only be able to purchase $40,750 of XYZ due to its 40% requirement.
Still have questions?
You can reach a Margin Specialist by calling 877-877-0272 ext 1
Margin trading increases risk of loss and includes the possibility of a forced sale if account equity drops below required levels.
Margin is not available in all account types.
Margin trading privileges subject to TD Ameritrade review and approval. Carefully review the Margin Handbook and Margin Disclosure Document for more details.