What Is Open Trade Equity (OTE)?
Let me explain Open Trade Equity (OTE) directly to you: it's the net of unrealized gain or loss on your open derivatives positions. In simpler terms, OTE captures the paper gains and losses based on the current market value compared to what you paid or received for the position. Once you close the position, that gain or loss becomes realized.
Key Takeaways on OTE
You should know that OTE shows the unrealized gain or loss on an open position before you close it out. It's particularly useful for giving you a clearer view of your actual profit and loss, especially in margined trades. A positive OTE means better chances of realizing a profit, while a negative one increases the risk of a loss.
Understanding Open Trade Equity
OTE matters a lot if you're trading on margin, as those fluctuations directly affect the equity available in your account. If unrealized losses push your equity below the maintenance margin you've agreed to, you'll get a margin call. That forces you to deposit more funds to restore the equity or liquidate some positions.
Remember, total equity equals your account balance plus or minus OTE. Since maintenance margins are part of your contract with the broker, you're legally required to keep them up. If you can't or won't add cash or sell holdings during a margin call, the brokerage can close positions in your portfolio at their discretion to get the account back to the minimum.
OTE specifically measures the difference between the initial trade price of all your open positions and their last traded price. It gets its name because these positions aren't offset yet. This gives you an accurate snapshot of your account's real value, with all open positions marked to market. Essentially, it tells you how much money would be in your account if you closed everything at current rates.
Example of OTE
Consider this scenario: you have $10,000 in your account and use it to buy 50 shares of XYZ at $200 each, totaling $10,000. Right after the trade, OTE is zero. The next day, the share price rises to $250, giving you $2,500 in unrealized gains—so OTE is up $2,500, and your total equity hits $12,500. If you liquidate, those gains become realized, your balance goes to $12,500, and OTE resets to zero.
But if you hold and the price drops to $100, you'd have a $5,000 unrealized loss. That loss stays unrealized until you sell, but OTE is negative $5,000, dropping your total equity to $5,000. A negative OTE signals a paper loss, while positive means a paper gain.
Open Trade Equity at Margin Call
FINRA requires at least $2,000 in cash or securities to open a margin account, and you must maintain at least 25% of the securities' total market value as maintenance margin—though brokers often set it higher, like 30% or more.
Take this example: you want to buy 500 shares at $20 each, totaling $10,000, but you only put up $5,000 with a broker requiring 50% initial margin and 35% maintenance. You've borrowed $5,000. At execution, OTE is zero, investment value is $10,000, initial margin is $5,000, and maintenance is $3,500.
If the price falls and the value drops to $6,000, OTE goes negative $4,000. Your $5,000 margin is now effectively $3,000 after the loss adjustment, which is below $3,500—so you get a margin call. You'll need to deposit $2,000 to meet the 50% requirement, either in cash or securities, or liquidate positions to reduce requirements, often realizing a loss.
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