Calculation of available funds for trading
Assume you have 
in cash (net liquidating ), and you short a 2X Leveraged ETF for 
. According to Schwab’s margin requirements, the shorting maintenance requirement is 
of the market value, which is 
. So your AFFT now is 
.
If one day the ETF price doubles to (floating loss ), the net liquidating will be 
. The maintenance also increases to , leaving your AFFT at 
, and triggering a margin call.
Even though you still have 
cash in your account, you can’t close the short position because your AFFT and stock buying power are (SBP equals AFFT divided by 
). Therefore you need to add more cash otherwise the broker will liquidate your short position.
To prevent this, let the maximum short position be 
(if the ETF price doubles, we rebalance it to ): 
. Ensuring 
, we find 
.
Since rebalancing can be done gradually instead of all at once, you’d better keep the initial maximum short position below 
for a 2X Leveraged ETF.
What if you want to short a 3X Leveraged ETF and set a stop-loss at ? When the 3X ETF rises to 
, the maintenance requirement is 
of , which is 
. The net liquidating value will be , leaving 
AFFT, and your SBP will be 
. To rebalance the short position to 
, you need 
in cash to buy back. However, as we calculated above, your SBP is only , so you can’t rebalance it to 50% all at once. Instead, you can first buy back 
, then buy back the remaining 
for instance.
The content of this article is not investment advice and does not constitute an offer or solicitation to offer or recommendation of any investment product.
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