Open Trade Equity

Open Trade Equity (OTE) refers to the total unrealized gains or losses in an open trade position. It is mostly visible in equity trading, representing the net value of total equity held and account balance. The sole purpose of OTE is to determine the total profit or loss gained on current positions.

OTE is calculated as the difference between the current price and the entry price of the contract. It represents the time when the trader bought the contract and the price that is ongoing in the market. Moreover, it can also be used as a tool to monitor the performance of investments.

Open trade equity is the stock market term used to describe the unrealized gains or losses in a trade position before its closing. It is the difference between the initial purchase price and the current security value. Thus, if the OTE increases, the chances of profits also rise, resulting in a positive situation. However, a negative OTE raises the chances or odds of losses for the trader. 

There are five major components of open trade equity futures that occur in a trade position. It includes entry price, current market price, number of contracts, contract size, and point value. For instance, a trader buys a stock at $200 in intraday trading. Here, $200 acts as the entry price. However, when the price moves or fluctuates, it decides the current market price. If the current stock price is $150, it is the current price for the equity. Likewise, contract size refers to the standardized quantity or units purchased by a trader. 

However, the number of contracts applies specifically to OTE futures. It refers to the total contracts purchased by traders. Point value is the point that determines the loss or profit for the trader. For instance, if a trader enters into a bullish position and assumes the breakeven point as $250, any further fluctuations will lead to unrealized gains until sold. 

OTE calculation is crucial in determining account margin. Any constant volatility or frequent fluctuations can affect the margin. If it falls between the minimum amount, it is known as a margin call. In such cases, traders must fulfill the margin requirements to resume trading in the market. However, if the investor continues to trade below the margin, there is a chance of negative OTE.

By using the open trade equity formula, traders can calculate the net value of an unrealized amount on trades. Let us look at them: 

Open trade equity (±) = Total equity - Account balance 

Here, total equity refers to the investment in trade positions, while the account balance is the funds vested in the trading account. For instance, if a trader has $12,000 in their margin account and takes $1000 futures trade, initially, there is no OTE. But, as the contract price fluctuates, the OTE value also changes, leading to unrealized gains or losses.

Let us look at some examples to understand the concept better:

Example #1

Suppose James is an experienced futures trader with over three years of market experience. He has gained both profits and losses during this process. At present, he has around $10,000 in his trading account. He makes a trade of $2000 with Tevink Ltd. However, the OTE was nil or zero at the outset. However, after a few days, the stock experiences a huge spike in its value. As a result, the profit rises by 20% ($250). The following week sees unrealized gains of $300. 

James decides to realize the futures contract at the prevailing rate. Therefore, the profit that was accessible on the trade was converted to an account balance. Thus, upon closing the trade, the OTE again turns zero.

Example #2

Let's illustrate open trade equity calculation through a formula. Let us consider Kevin as an equity trader with three trades of $150 each. The remaining balance is $15,000. However, out of three, two trades are at a loss of $30, while one is at a profit of $500. By using the equation, the calculation of total equity is as follows:

Total equity = Account balance ± OTE

                    = $15,000 + ($500 - $30 - $30)

                    = $15,000 + ($440)

                    = $15,440

Following are the benefits of the OTE that are prevalent in equity trading:

• Helps in assessing the unrealized amounts: Traders can determine the profits and losses associated with trade positions. They can have a close watch over the open derivatives contracts and their performance. It also helps determine whether the investment is yielding desired returns or not. 
• Determining portfolio risk and exposure: Investors can assess portfolios and gain more insights into the risks associated with them. A high or positive OTE may indicate heavy investment in certain securities with potential profits but also indicate volatility. 
• Evaluation of trading strategies and making informed decisions: OTE helps evaluate the existing trading strategies based on the returns obtained. Traders can gauge their trading approach and make adjustments to get optimal portfolio performance.

In contrast to the benefits obtained, OTE has certain limitations. Let us look at them:

• Changes in the OTE due to market volatility: One of the limitations of OTE is the presence of unrealized losses and gains. It fluctuates until the trade is closed. As a result, the outcome realized may differ widely.
• Influence due to emotional biases: Investors often become a part of emotional biases during investment decisions. As a result, they may get influenced due to greed and fear and turn indecisive. Thus, it can negatively impact OTE.
• Complexity created by market factors: Certain macroeconomic factors and market dynamics can impact the value of futures contracts.