Author Topic: Help Me Understand IBKR Cash Margin Loan  (Read 520 times)

swirleyDude

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Help Me Understand IBKR Cash Margin Loan
« on: August 04, 2022, 07:05:00 PM »
I'm trying to figure out how much I can "safely" withdraw from IBKR as a cash margin loan without getting a margin call.

Let's say the numbers in my account look like:
Net Liquidation: $100,000
Maintenance Margin: $25,000
Excess Liquidity: $75,000
Cash Available for Withdrawal: $50,000

If I withdrawal $50,0000, as long as my portfolio stays above $50,000, then I won't be margin called. Is that correct?

Financial.Velociraptor

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #1 on: August 04, 2022, 08:11:25 PM »
If you withdraw 50,000 and your portfolio value falls by one dollar the next day, liquidation will start.  This is not a good market to be borrowing against.

swirleyDude

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #2 on: August 05, 2022, 08:48:28 AM »
What if I withdraw $10,000, then the market needs to fall by $40,000.01 before liquidation starts
$20,000, then the market needs to fall by $30,000.01  before liquidation starts

Correct?

Financial.Velociraptor

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #3 on: August 05, 2022, 05:49:39 PM »
What if I withdraw $10,000, then the market needs to fall by $40,000.01 before liquidation starts
$20,000, then the market needs to fall by $30,000.01  before liquidation starts

Correct?

SwirleyDude,

Are you asking out of intellectual curiosity or an attempt to 'game the system'?  If you hoping to play with fire and not get burned, you are being very foolish.

swirleyDude

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #4 on: August 05, 2022, 06:49:39 PM »
Quote
Are you asking out of intellectual curiosity or an attempt to 'game the system'?  If you hoping to play with fire and not get burned, you are being very foolish.

I'm not trying to game the system; I'm trying to understand the numbers better. I'd like to take out a margin loan for part of a down payment, and I want to withstand up to an 80% decrease in my portfolio. I think 80% is highly unlikely, and I'm willing to risk that.

bacchi

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #5 on: August 05, 2022, 07:02:27 PM »
If the market falls by 40%, IB will raise their margin requirements, causing a margin call. You'll then have to wire money to IB the next morning or risk a liquidation event.

It's one thing to borrow on margin for an investment but quite another to borrow for the roof over your head.

swirleyDude

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #6 on: August 05, 2022, 07:46:23 PM »
Quote
It's one thing to borrow on margin for an investment but quite another to borrow for the roof over your head.

It is an investment; I'm planning on house-hacking a multifamily property.

MustacheAndaHalf

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #7 on: August 06, 2022, 01:34:04 AM »
If the market falls by 40%, IB will raise their margin requirements, causing a margin call. You'll then have to wire money to IB the next morning or risk a liquidation event.

It's one thing to borrow on margin for an investment but quite another to borrow for the roof over your head.
I thought IBKR specifically liquidates the same day?

They offer lower rates, and I believe part of that is more aggressive risk management on their end.  Most brokers use margin calls, but I think IBKR uses a real time approach.

Financial.Velociraptor

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #8 on: August 06, 2022, 08:42:17 AM »
If the market falls by 40%, IB will raise their margin requirements, causing a margin call. You'll then have to wire money to IB the next morning or risk a liquidation event.

It's one thing to borrow on margin for an investment but quite another to borrow for the roof over your head.
I thought IBKR specifically liquidates the same day?

They offer lower rates, and I believe part of that is more aggressive risk management on their end.  Most brokers use margin calls, but I think IBKR uses a real time approach.

IBKR does NOT issue formal margin calls.  They use an automated algorithm that liquidates IMMEDIATELY upon reaching a non compliant balance.  The order of liquidation is what provides the most security to IBKR and not what is tax efficient for the user.

Financial.Velociraptor

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #9 on: August 06, 2022, 08:45:55 AM »
Quote
Are you asking out of intellectual curiosity or an attempt to 'game the system'?  If you hoping to play with fire and not get burned, you are being very foolish.

I'm not trying to game the system; I'm trying to understand the numbers better. I'd like to take out a margin loan for part of a down payment, and I want to withstand up to an 80% decrease in my portfolio. I think 80% is highly unlikely, and I'm willing to risk that.

@swirleyDude

In that case, your math above was "right".  Exceptions to the margin rules apply depending on your holdings.  And the rule can change at any time without notice.  A 10,000 loan should be fine (but watch it, there is no guarantee the market can't fall 80% or more!)

If you are taking a very temporary loan, say three months; why not eliminate liquidation risk entirely by collaring your portfolio?  You will give up your upside above your call strike but be protected below your put strike.  This can be otherwise "costless" or obtained for a trivial debit.

MustacheAndaHalf

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #10 on: August 06, 2022, 02:04:23 PM »
... and I want to withstand up to an 80% decrease in my portfolio. I think 80% is highly unlikely, and I'm willing to risk that.

... but watch it, there is no guarantee the market can't fall 80% or more!)
How much do you want to bet?  Literally - what odds do you give of the market falling 80% from here over the next 3 years?

Numerous structural changes have been made since the Great Depression, which is the last time a loss of that magnitude hit the U.S. stock market.  I would bet against anyone giving 10:1 odds, because I think it's a less than 2% chance.  Hopefully less than 1%, but stock market moves can be extreme and hard to predict.

My advice would be to mostly ignore the chance of an -80% drop, because there are far more numerous and likely problems.  It's a bit like looking up to check for lightning strikes instead of watching for cars as you cross the road.

Rubic

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #11 on: August 06, 2022, 02:05:29 PM »
I'm trying to figure out how much I can "safely" withdraw from IBKR as a cash margin loan without getting a margin call.

Zero.  Zero is a safe number to use for a cash margin loan in a brokerage account.

MustacheAndaHalf

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #12 on: August 06, 2022, 02:10:50 PM »
I'm trying to figure out how much I can "safely" withdraw from IBKR as a cash margin loan without getting a margin call.
Zero.  Zero is a safe number to use for a cash margin loan in a brokerage account.
OP's "how much" means if $1 is safe, your answer isn't helpful.

---
One admission of hypocrisy - in 2020 I took out a margin loan, and planned for all manner of crashes, including a -90% crash.  But in every instance, my conclusion was the same.  When a crash is between -20% and -30%, it's time to accept losses and pay back the margin loan at a loss.  So for me, all crashes over 1/3rd were about the same, since I planned to end leverage by that point every time.

It might be worth calculating what happens if the markets drop 1/4th, 1/3rd or 1/2 from here.  You will need to decide what amount to withdraw, and simulating those three scenarios might help.

Ramparts

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #13 on: August 07, 2022, 12:35:21 PM »
If you withdraw 50,000 and your portfolio value falls by one dollar the next day, liquidation will start.  This is not a good market to be borrowing against.

Is this correct? It looks like the OP's example is on Reg T, with its 50% initial and 25% maintenance margin. For it to fall below the 25% maintenance, the portfolio value would need to fall by 33% (66666 - 50000) / 66666 = 25%. I'm still learning as well, so I could also be mistaken (it is a confusing topic!). My naive understanding of the initial vs. maintenance margin is because it would be rather silly to use up all the initial margin and have a $1 fluctuation cause a liquidation. Similarly, for the 10k withdrawal example, the portfolio would need to fall 86% to 13333 to hit the maintenance level (13333 - 10000) / 13333 = 25%.

Financial.Velociraptor

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #14 on: August 07, 2022, 12:49:49 PM »
If you withdraw 50,000 and your portfolio value falls by one dollar the next day, liquidation will start.  This is not a good market to be borrowing against.

Is this correct? It looks like the OP's example is on Reg T, with its 50% initial and 25% maintenance margin. For it to fall below the 25% maintenance, the portfolio value would need to fall by 33% (66666 - 50000) / 66666 = 25%. I'm still learning as well, so I could also be mistaken (it is a confusing topic!). My naive understanding of the initial vs. maintenance margin is because it would be rather silly to use up all the initial margin and have a $1 fluctuation cause a liquidation. Similarly, for the 10k withdrawal example, the portfolio would need to fall 86% to 13333 to hit the maintenance level (13333 - 10000) / 13333 = 25%.

My apologies. Overnight, it is maintenance margin that matters.  I use margin, but NOT a loan.  That is, I have a lot of options spreads so the margin I use if always fully hedged AND I maintain a cash balance.  An implication of that is my maintenance margin and initial margin are always substantially the same.  Rarely enough difference to use the lower number mentally. 

swirleyDude

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Re: Help Me Understand IBKR Cash Margin Loan
« Reply #15 on: August 07, 2022, 06:09:03 PM »
If you withdraw 50,000 and your portfolio value falls by one dollar the next day, liquidation will start.  This is not a good market to be borrowing against.

Is this correct? It looks like the OP's example is on Reg T, with its 50% initial and 25% maintenance margin. For it to fall below the 25% maintenance, the portfolio value would need to fall by 33% (66666 - 50000) / 66666 = 25%. I'm still learning as well, so I could also be mistaken (it is a confusing topic!). My naive understanding of the initial vs. maintenance margin is because it would be rather silly to use up all the initial margin and have a $1 fluctuation cause a liquidation. Similarly, for the 10k withdrawal example, the portfolio would need to fall 86% to 13333 to hit the maintenance level (13333 - 10000) / 13333 = 25%.

I think this is the most helpful answer. It looks like I can take out 15% of the balance, and withstand an 80% crash. I'll probably take out slightly less than 15% since interest accrues, and I'll also aggressively pay back the loan within a year or two.

I know there's always a risk of an 80% crash, but:
  • That's super unlikely
  • If there's an 80% crash, there's probably bigger issues I need to worry about than my portfolio