How do Futures Margins Work?
August 4, 2011
Margin (sometimes called performance bond) is the minimum amount of money required to be in your account with your broker to be able to trade a particular futures contract. This amount of money varies from market to market and differs if you are doing a daytrade versus a position trade. The purpose of this deposit (or earnest money) is to make sure that whoever is trading futures has money in their account to pay for possible losses on that trade. The unique characteristics about futures trading margin is the relatively low amount required and the fact that you do not have to pay interest on the remaining margin balance. Most people are familiar with the ability to trade stocks with up to 50% margin where you have the ability to buy, say, $20,000 worth of stock with only $10,000 in your account and you are required to pay interest on the $10,000 you are borrowing.
With futures margins you may only need to have as little as 1% of the contract value on hand with your broker and you do not pay interest on the remaining 99%. For example as of this writing, the Emini S&P is trading at about 1400.00 and each point is worth $50, so the total contract value is $70,000, and according to the CME the margin required is $3,850. This means you need $3,850 to position trade one contract or only about 5% of the total contract value. So as you can see futures margins are much lower than stock margins, but this is a double-edged sword. This means a small move in the futures price can equate to a large move relative to amount of money in your account. Obviously, this is a good thing if you are correct with your trade, but very dangerous when it comes to losing trades.
Daytrade Margins are set by the individual brokerage firms and are even less than the position trade margins. For example ApexTrader's daytrade margin for the Emini S&P is only $500 ($400 on NinjaTrader) per contract, so with a contact value of $70,000, this means the margin required is only about 1% of the contract value. As you can see this further increases the leverage and therefore risk of futures trading, making small moves even more magnified. To qualify for daytrade margins you need to make sure you are flat (have no positions) on the market's close which is 3:15p & 4:15p CDT for the Emini S&P.
Position trade or overnight margins are referencing the amount of money required to hold a position in a particular market past the closing time of that market. This margin amount is dictated by the exchange which determines the value based on the market value of the futures contract and its volatility. These margins are subject to change and are typically posted on the exchanges' websites. When referencing position trade margins there are two numbers to be aware of, first, you will see something called the Initial Margin which is the amount needed to initially put on the trade ($3,850, currently for the Emini S&P) and then there is the Maintenance Margin, usually 80-90% of the Initial Margin, which is the amount of money required to maintain in your account after the position is put on ($3,500, currently). So, should your account balance fall below this Maintenance Margin you will be on a Margin Call. Margin Calls are treated on a case-by-case basis, but typically your position may be liquidated and/or you may be required to deposit more money (enough to bring your account back above the Initial Margin requirement) with your broker to keep the position. Here is an example of a new $10,000 account that buys two Emini S&Ps which turns into a losing position trade and incurs a margin call:
Starting Account Balance = $10,000
Initial Margin Required = $7,700 (2 X $3,850)
Maintenance Margin Required = $7,000 (2 X $3,500)
In this example, the account starts with more than the Initial Margin ($7,700) so a position trade of two Emini S&Ps can be placed, but let's say the trade goes sour and the account balance falls to $6,000 which is $1,000 below the Maintenance Margin. You are now on a margin call of $1,700 ($7,700 (Initial Margin) - $6,000 (new Account Balance)) and therefore need to add at least $1,700 to your account or get out of one or both of your Emini S&Ps to meet the margin call.
For a list of ApexFutures' daytrade margins and links to the exchanges' websites listing position trade margins, click here.