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Margin Trading from A to Z: A Complete Guide to Borrowing, Investing and Regulation



Trading on margin may be considered a high-risk strategy, but purchasing securities in this manner is nothing more than purchasing securities on credit. And if properly performed, this investment approach can yield significant profits.

While there's risk in any leveraged investment, with knowledge of the product, diversification, and constant monitoring, this risk can be greatly reduced. Certainly, there is nothing new in these concepts, and nobody is more familiar with them than author Michael Curley. With over fifty years of experience in the field of finance—including fifteen years in the banking industry and fifteen years in the brokerage industry—Curley knows what it takes to make it as a successful investor, and now, with Margin Trading from A to Z, he'll show you how.

Margin Trading from A to Z offers a step-by-step explanation of the mechanics of the margin account. Filled with in-depth insights and expert advice, this book uses a hands-on approach to show how a Regulation T margin call is arrived at; how it may be answered; and what an account looks like once a call is issued and after the call is met.

Throughout these pages, you'll quickly become familiar with the essential elements of margin trading and learn how to operate within this dynamic environment. Some of the issues covered by this detailed guide include:

  • Initial and minimum maintenance requirements
  • The intricacies of the Special Memorandum Account (SMA)
  • Margin trading as it relates to short selling, bonds, and options
  • The opportunities that a Portfolio Margining methodology presents
  • And much more

MICHAEL T. CURLEY has fifty years of experience in the field of finance, including fifteen years in the banking industry and fifteen years in the brokerage industry. He has attained experience as a manager of operations at Citibank, as a vice president of operations at both State Street and Hartford Trust Company of New York, and from work in the Division of Compliance, Finance, and Margin at the New York Stock Exchange. Since 1987, Curley has been a full-time financial trainer and consultant. He currently teaches at the New York Institute of Finance and at the Securities Operations Forum.

Preface xi

About the Author xv

CHAPTER 1 Cash Accounts 1

Sale of Securities 3

Paying for Securities by the Sale of Other Securities 3

Delivery against Payment 4

Employee Stock Options 6

Chapter One Questions 7

CHAPTER 2 Initial Federal Margin Requirements 9

Purchases 9

Sales 16

Meeting a Margin Call 17

Chapter Two Questions 19

CHAPTER 3 Initial and Minimum Maintenance Requirements 21

Initial Requirements 21

House Requirements 23

NYSE Minimum Maintenance Requirements 23

Chapter Three Questions 29

CHAPTER 4 The Special Memorandum Account 31

Customer's Account 35

Chapter Four Questions 42

CHAPTER 5 Short Sales 45

Covering Short Sales 51

NYSE Minimum Maintenance Requirements 52

Sample Transactions 53

Short Sale versus the Box or Short against the Box 55

Prime Broker 59

Chapter Five Questions 62

CHAPTER 6 Bonds 65

U.S. Government Securities 67

Zero-Coupon Government Obligations 67

Municipals 69

Nonconvertible Corporate Bonds 72

Chapter Six Questions 74

CHAPTER 7 Miscellaneous Categories 77

When-Issued and When-Distributed Transactions 77

Customer’s Accounts 78

Marks to the Market 80

When-Distributed Securities 80

Segregation of Customers' Securities 80

Review of Customers' Accounts 81

Interest Charges 83

Margin on New Issues 85

Day Trades 85

Requirements for a Pattern Day Trader 86

Time and Tick 87

Chapter Seven Questions 89

CHAPTER 8 Options 91

Definitions 92

Additional Definitions Related to the Types of Options 93

Examples 95

Requirements for the Purchase and/or Sale of Options 100

Long-Term Equity Anticipation Securities 101


LEAPS Example 102

Bull Spread Call Debit 106

Bear Spread Call Credit 107

Bull Spread Put Credit 107

Bear Spread Put Debit 108

The American Style 108

The European Style 108

Other Types of Options 108

Index Options 108

Interest Rate Options 109

Additional Details Concerning Options 113

Chapter Eight Questions 114

CHAPTER 9 Portfolio Margining 121

Margin Deficiencies 125

Chapter 9 Questions 126

Eligible/Hedged/Unhedged Positions 126

Account Set-up 126

Unlisted Derivatives 126

Liquidations 127

APPENDIX A The Federal Reserve 129

APPENDIX B Customer Margin Account and SMA Sheets 137

APPENDIX C Answers to Chapter Questions 139

APPENDIX D Final Examination Questions 151

APPENDIX E Final Examination Answers 161

Glossary of Terms 169

Index 177