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Futures Margins
If you are familiar with the margin for stock trading, you know that this is the amount the broker allows you to borrow using your funds as a collateral. Usually, this is 100%, meaning if you hold $10,000 in your account, you can control $20,000 of stock. In some situations, that only pros or semi-pros are allowed to take advantage of, your margin can be greater.
While the margin for trading in stocks is simply your borrowing power for stocks, the margin on futures can be defined as a minimum cash requirement for your futures position. Similar to a performance bond or a good faith deposit, the margin on futures is set by the exchanges based on the corresponding market volatility and can be changed at anytime if this volatility changes. Generally, the margin rates range between 2-15 percent of the value of the futures contract, with most contracts having their margin set around the 5 percent.
Individual brokers can reduce the value of this margin for intraday
positions, that is for positions open and close on the same day. Because
of this, the margin varies, even widely, from one broker to another, being
never higher than the value established by the exchanges that takes into
account all kinds of positions, including those held overnight, for which
the margin is bound to be higher to compensate for the higher volatility
during the times when the trading is not very active.
There are two types of margins in futures: the initial margin and the maintenance
margin. The former is the required amount of funds that must be deposited by
you before your positions are initiated. The latter is the minimum amount of cash/buying power required in order to keep
your position open.
While the initial margin requirements must be met at the time of the trade,
the maintenance margin will only become a factor if the account value is decreasing. In the event that the account value falls below the maintenance margin requirement,
you will receive a margin call for funds. In this case, you will need to add enough cash to satisfy the initial margin requirement of the position.
In order to illustrate the difference between the initial and the maintenance margin,
let us consider the following example.
Suppose you had $5,000 in your futures trading account. You wish to open
an intraday position in the E-mini S&P. In order to place this trade,
you would need at least $2,250.00 in the account (if you were a customer
with the Interactive Brokers, to keep this example realistic), which is the initial margin of one E-mini S&P futures
contract set by this broker. Because your account balance exceeds the amount of the initial margin,
you would be able to open your position and you would be able to purchase
not just one, but even two futures contracts. Suppose though that you
purchased only one, to keep this example simple.
Suppose now that after this purchase, the market moved against you causing the account value to fall to $1,700, however unlikely this may be. Since the account value is now less than the maintenance margin of $1,800, you would receive a margin call for $100, the difference between the initial margin and the account value.
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Disclaimer: HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS UNLIKE AN ACTUAL PERFORMANCE RECORD. SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.