Lesson 5 of 7 · 15 min

Long, short and leveraged positions: leverage ratio, margin return and margin calls

A long position gains when prices rise, a short position when they fall; borrowing to buy multiplies both gains and losses by the leverage ratio, and the maintenance margin sets the price at which the broker calls for more equity.

In short

  • Long: you own the asset or contract; gains unlimited, losses capped at 100%. Short: you sold what you do not own; gains capped at 100%, losses unlimited.
  • Long a put = short exposure to the underlying; short a put = long exposure.
  • Short sellers borrow securities, pay payments-in-lieu of dividends, and leave the sale proceeds as collateral, earning a short rebate rate.
  • Leverage ratio = position value ÷ equity; maximum = 1 ÷ initial margin. Equity return ≈ leverage × asset return (before interest, dividends, commissions).
  • Margin-call price for a long margin purchase: P0×1−initial margin1−maintenance marginP_0 \times \frac{1 - \text{initial margin}}{1 - \text{maintenance margin}}.

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Long, short and leveraged positions: leverage ratio, margin return and margin calls · Market Organization and Structure