GameStop shares have been moving around quite a bit in the past month, and that increased volatility has brought with it an increase in margin requirements from one of the largest brokers in the United States. Schwab has posted an update to margin requirements for several companies' stocks, including GameStop.
Here's an excerpt of the update from Schwab's brokerage client website:
The following requirements are in place for affected securities:
- 100% margin requirement for long positions.
- 300% margin requirement for short positions.
- Long calls, long puts, and covered calls are permitted.
- Selling short put options is permitted if you have available funds to cover the entire amount of the exercise.
- Selling naked calls is permitted if you have available funds for increased requirements.
- We continue our commitment to help investors better understand what's behind these moves and how to navigate the market impact.
We'll keep this list updated with the latest information.
Please note, neither Charles Schwab & Co. nor TD Ameritrade has halted clients from buying any stocks, or selling any stocks they own, and neither firm has restricted executing any basic options strategies.
First of all, short put positions (bullish by nature) now have to be backed with 100% of the potential exercise value. If an individual sold a single $160 strike put contract in GameStop, they would have to have the cash to back up the trade. It doesn't matter if the options contract is in or out of the money, Schwab is clearly reining in excessive risk-taking with this very stringent margin requirement. There is even a 100% margin requirement for long positions in GameStop.
GameStop (GME) short sellers are also waking up to some new margin requirements over at Schwab on Monday. Shorts now need three dollars of collateral for each dollar of GME they are short. This affects the amount of margin required for selling of naked call options as well.
These changes to margin requirements shouldn't affect many long-term investors in GameStop as long as they own the shares in a cash account or are not using leverage. GameStop's initial short squeeze and the ongoing volatility in the stock would never have occurred if hedge funds didn't greedily short more than the existing float of shares. Much of the excessive risk-taking going on in shares of GameStop remains on the short side of the trade in the options and shares. Smaller retail investors tend to invest with what they have, while Wall Street and hedge funds use borrowed money or stock to turn a quick profit.
We will keep an eye on other brokerages and market makers to see if this is a one-off event or the beginning of a trend. Schwab has over $7 trillion in assets under management, which is a lot of bananas.
This article is only meant for educational purposes, and should not be taken as investment advice. Please consider your own investment time horizon, risk tolerance, and consult with a financial advisor before acting on this information.
At the time of this article, Shacknews primary shareholder Asif A. Khan, his family members, and his company Virtue LLC had the following positions:
Long GameStop via GME shares (hedged with out-of-the-money put options)
Long GameStop via GME call options
Asif Khan posted a new article, Schwab updates GameStop (GME) margin requirements for longs, shorts & options trading
Remember, its not how long you make your positions but how you make them long.