How does the leverage ratio change before and after Earnings are released?
Two days before a company's Earnings are released, the leverage for new trades on its stocks in R StocksTrader is automatically reduced. Existing open positions are not affected. The leverage is restored to its original level the day after the Earnings are released.
Before providing a specific example, read this article to review important definitions such as Equity, Margin, Free Margin, and Unrealised P/L.
Example:
Day 1:
Conditions: The client deposits $10000 into their trading account.
As a result, the current state of the client’s account:
- Deposit: $10000
- Margin: $0
- Unrealised P/L: $0
- Equity: $10000
- Free Margin: $10000
Day 2:
Conditions: The client buys 1 share of RH for $253.11, with leverage of 1:20.
As a result, the current state of the client’s account:
- Margin: $12.66 (Price of financial instrument/Leverage, i.e., 253.11/20)
- Unrealised P/L: $-3.94
- Equity: $9996.06
- Free Margin: $9983.40 (Equity – Margin, i.e., 9996.06 – 12.66)
Day 3:
Conditions: RH stock price dropped to $247.35.
As a result, the current state of the client’s account:
- Margin: $12.66
- Unrealised P/L: $-8.22
- Equity: $9991.78
- Free Margin: $9979.12
Day 4:
Conditions: RH stock price is $248.72. The client buys 1 additional share, but leverage has dropped to 1:4 (due to the upcoming RH Earnings the next day).
As a result, the current state of the client’s account:
- Margin: $74.84
- Unrealised P/L: $-11.51
- Equity: $9988.49
- Free Margin: $9913.65
Note: The margin includes the sum for both open positions — the one opened on Day 2 (253.11/20) and the one opened on Day 4 (248.72/4): 12.66 + 62.18 = 74.84.