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What Is Open Trade Equity (OTE)?

Views 13242023.01.18

Open Trade Equity (OTE) refers to total gain or loss on an open position. In other words, OTE is defined as total losses and gains characterized by the price paid for a position and current market values. The loss or gain will be realized once the position is closed.

Key Takeaways

Open Trade Equity (OTE) refers to an open position's unrealized loss or gain.

OTE helps traders understand their underlying profit and loss, especially when trades are done on margin.

The likelihood of achieving a profit increases with a positive OTE while realizing a loss increases with a negative OTE.

Understanding Open Trade Equity

OTE is particularly crucial for margin investors because changes affect the available equity in their accounts. In a margin account, a margin call is issued if the investors' available equity falls below the contracted maintenance margin. In a margin call, investors have the following two options:

To liquidate open positions. They could either be the whole or a portion of the open position.

To deposit additional funds.

Both these options help investors to bring the available equity back above the contracted maintenance margin.

Total Equity = Account Balance ± Open Trade Equity

In a margin account, investors need to maintain their margins because they're bound to do so in a contract with the broker.

A brokerage is authorized to liquidate open positions from a client's portfolio at their discretion to return the account to its minimum value if a client isn't willing to make a cash deposit or sell holdings in response to a margin call.

Open Trade Equity (OTE) calculates the difference between each open position's starting trade price and current trade price. The term describes that the established positions have not yet been offset. All open positions are marked-to-market (a method of measuring the fair value of accounts that can fluctuate over time), which helps the trader get a precise picture of the account's current worth.

Example of OTE

Let's understand OTE with a simple example. Suppose a trader has $20,000 in an account and wants to purchase 50 shares at $400 for a stock. Total investment= $20,000

OTE at the instance of the trade= zero

Suppose the price for each share increases to $450 on the next day. It means that

Unrealized gains for that trade= $2500

OTE =$2500

Total equity= up to $22500

If the investors want to liquidate on the current trading position, the gains are said to have been realized. But the gain is unrealized until the stock is sold. As a result, an increase of $2500 will be observed in the account balance with zero OTE.

Now let's suppose the stock price drops to $200, leading to an unrealized loss of $10,000. This loss will stay unrealized till the position is closed or sold. Now the OTE will be negative $10,000, and there will be a decrease in the total account equity by $10,000.

Open Trade Equity at Margin Call

Any investor intending to open a margin account needs to have at least $2,000 in cash or securities to get started, according to the Financial Industry Regulatory Authority (FINRA). Moreover, FINRA also requires investors to maintain an account balance of 25%. Typically, the maintenance margin could also be contracted at a higher percentage of up to 30% bY the broker dealer.

For instance, you want to buy 500 shares of a stock at $20 per share. But, you don't have enough investment, i.e., $10,000. That's why you could open an account of $5,000 with a broker at an initial margin of 50% and a maintenance margin of 35%. Thus, you borrowed $5,000 while investing $10,000. In this case,

OTE= zero

Total investment= $10,000

Initial margin= $5,000

Maintenance margin= $3,500

Suppose the total value of 500 shares falls to $6,000. It will indicate a negative OTE of $4,000. The value of the investment the investor has put as a margin would also decline to $3,000. Since this value is less than the maintenance margin $3500, you would get a margin call.

You need to deposit an extra amount in the margin account to fulfill the 50% account. In this case, you have to deposit $2,000. You may also liquidate all or a portion of the open position to reduce the margin requirements. As a result, a loss in trade will be realized.

Conversely, suppose the total value of 500 shares goes up to $15,000. In this case, the OTE will be $5,000, and you don't have to meet a margin call.

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