Short Sale Margin Calculations

Updated: Mar 7, 2021

A short sale is when an investor borrows shares, sells them, and then purchases them at a later date to return them to the seller.

Short positions can be entered using margin. This means that the investor is not contributing 100% of the cash to the trade upfront.

The two types of margin requirements when going short are initial and required margin.

Initial Margin - the % of the value of shorted shares that the customer must contribute in cash.

Example: Short \$100 worth of shares @ 50% initial margin. The investor must contribute \$50.

Maintenance Margin - the % of of the value of shares owing to the lender which the short seller must-have. This changes as the value of the shares owed changes.

See examples below

Maintenance Margin Calculation

The best way to learn is with an example.

Margin% +1 = value of assets / value of shares owed

Margin % = the stated % margin. For example, if the maintenance margin was 30% this value would.3. We have to add 1 because the margin requirement does not include the money we get when we sell our shares initially.

Value of Assets = # of shares sold short * price of share when shorted + Initial margin

Value of shares Owed = # of shares shorted * current value of one share of stock

Example 1

You sell a short 1 share of ABC at \$100 a share. The initial margin is 50% and the maintenance margin is 30%. If the current share price \$125 are you subject to a margin call?

Margin % +1 = value of assets / value of shares owed

Margin + 1 = (100+50) / \$125

Margin +1 = 1.2

Margin = 20%

Example 2

You sell 1000 shares of ABC short at 10 dollars. The initial margin requirement is 40%. If the maintenance margin is 20% at what price will you recieva margin call?

Margin % +1 = value of assets / value of shares owed

1.2 = 14 / p

.12 * p = 14

p = 14 / 1.2

p = \$11.67

Proof 14/11.67 -1 =.2