How do Full Margins Work

How do Futures Margins Work?

Margin (sometimes called performance bond) is the minimum amount of money required in your account to be able to trade a particular futures contract.  The purpose of Margins is twofold, first, margins provide leverage to trade Futures products, and second, Margin requirements try and ensure that whoever is trading has enough money in their account to cover adverse market moves.  Futures trading margins are unique in that a relatively low amount is required to trade, and 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 $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 %.  

Example

The E-mini S&P 500 is trading at about 3212.00 and each contract is worth $50 x the Index Value, so the total contract value is approximately $160,600.  According to the CME, lets imagine the Initial Margin required to trade the E-Mini S&P 500 is $13,200 (always check with the CME for current margin rates).  This means you need a balance of $13,200 to trade one contract or only about 8% 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 

These are typically set by the individual brokerage firms and are normally less than the CME's Initial Margins.  For example, Edge Clear daytrade margins for the E-mini S&P 500 (ES) starts at 50% of initial margin per contract and can go as low as 25% of the initial margin. With a contact value of $160,600, this means the day margin required is only about 4% of the notional contract value.  This further increases the leverage and therefore risk of futures trading, making small moves even more magnified. 

Position trade or overnight margins 

This references 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 through their SPAN Margin Calculation.  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 is the Initial Margin, which is the amount needed per contract to satisfy a margin call. Second is the Maintenance Margin, usually 80%-90% of the Initial Margin, which is the amount of money per contract required to maintain in your account to carry a position through the close of trading the day after the Initial Margin is met (currently $13,200 as of 7/14/2020).   

Margin Calls

Accounts that do not have enough money to cover the Initial Margin per contract at the close of the trading session are placed on a Margin Call.  Accounts on a Margin Call are required to meet the full Initial Margin per contract before the close of trading in the following session by liquidating positions or adding funds to the account. 

Below is an example of a trader with a $28,000 account that buys two E-mini S&P Contracts:


Starting Account Balance = $28,000

Initial Margin = $26,400 (2 X $13200) 

Maintenance Margin = $24,000 (2 X $12,000) 


In this example, let's say the market goes against the traders position and the account balance falls to $20,000. The trader must send additional funds to bring the account back above the Initial Margin or close one or both of their E-mini S&P’s to meet the Initial Margin before the 4 PM CT close. 

**Please note, exchange margins are subject to change at any time.  The above calculation is an example.  Always check with the CME and your broker for current margin rates. 

**Low margins are a double edged sword, as lower margins mean you have higher leverage and therefore higher risk.


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