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Understanding Futures Margin | Fundamentals of Futures Trading Course

many traders are drawn to futures

because of leverage leverage allows

traders to commit a smaller amount of

capital to control a large asset

this means that smaller changes in the

underlying price can translate into

larger gains or losses in futures

trading this leverage is made possible

by trading on margin margin is the

amount of funds required to enter a

futures position which is usually a

fraction of the contracts total value

margin for futures is different than

margin for stocks in stocks you borrow

against your assets like a loan in

futures you put down a good-faith

deposit called the initial margin

requirement it's important to note that

gains or losses on futures positions

could exceed the initial margin

requirement understanding margin is

essential for a futures trader so let's

look at an example let's say trader a is

bullish on the sp500 and decides to take

a long position on the e-mini S&P 500

index futures or /es for this example

we'll say the EES is trading at 2800

which is a notional value of a hundred

and forty thousand dollars notional

value is the cash equivalent value to

owning the underlying asset or the

contracts total value in other words if

you wanted to buy a portfolio that

reflected the S&P 500 with the same

value as an es contract you'd have to

invest a hundred and forty thousand

dollars however by using a futures

contract trader a can put down a

fraction of the contracts a hundred and

forty thousand dollar notional value

margin is set by the futures exchange

and it's typically three to twelve

percent of the contracts notional value

some brokers may choose a higher

requirement therefore initial margin can

change at any time in this example let's

say the initial margin requirement is

$5,500 for trader A+ commissions and

exchange fees there are two margins

she needs to be aware of when trading

futures in addition to initial margin

there's also maintenance

margin maintenance margin is lower than

initial margin typically the initial

margin requirement will be a hundred and

ten percent of the maintenance margin

requirement when traders first enter a

futures position they need to put up the

initial margin requirement however after

established in the position traders are

held to the maintenance margin

requirement for this example treater a

has an initial margin of five thousand

five hundred dollars her maintenance

margin is five thousand dollars and her

account balance is also five thousand

five hundred dollars the cash for the

initial margin is automatically set

aside in her account once the order is

entered Trader days by order is routed

to the exchange and is connected with

trader B's sell order trader B is

bearish on the sp500 and shorts nes

contract trader B also puts up the

initial margin of five thousand five

hundred dollars because the buyer and

the seller put up the same initial

margin

let's check the numbers for trader B he

also has an initial margin requirement

of five thousand five hundred dollars

and is held to the maintenance margin of

five thousand dollars the same as trader

a for this example we'll say his account

balance is $5,500 the next day the sp500

fell five points let's see how this

affects our traders each point on the es

is equal to $50 so with the sp500

falling five points trader a loses two

hundred and fifty dollars while trader B

gains two hundred fifty dollars to

understand what this does to each

traders balance let's discuss settlement

at the end of each trading day futures

trades are settled or what's called

marked to market this is where the daily

gains or losses are credited or

subtracted from the account traders who

experience a loss will incur a cash

debit to their account and traders who

experience a profit will receive a cash

credit because trader a lost two hundred

fifty dollars her account was debited we

ducing her account balance to $5,250

traitor be profited $250 and was

credited to profits so his account

balance grew from five thousand five

hundred to five thousand seven hundred

and fifty dollars the next day the sp500

continued to slide and lost another ten

points or $500 because trader a lost

another five hundred dollars after

settlement her account fell to four

thousand seven hundred fifty dollars

which is below the maintenance margin of

$5,000 because trader a's account

balance is below the maintenance margin

requirement she has issued a margin call

in order for trader a to stay in the

trade

she must bring in her account balance

back up to the initial margin

requirement of five thousand five

hundred dollars

this could include depositing more money

closing the position or having her

existing position appreciate trader B is

pretty happy with his trade so far he

just gained another five hundred dollars

raising his account balance to six

thousand two hundred and fifty dollars

the next day the sp500 rallied 20 points

trader aides account increased by one

thousand dollars and is now at five

thousand seven hundred and fifty dollars

her account balance is back above the

initial margin requirement which means

she satisfied her margin call

remember if her position didn't

appreciate in value she'd have been

required to add funds or close her

position trader B's account balance went

from six thousand two hundred fifty

dollars to five thousand two hundred and

fifty dollars to end our example let's

say that both traders closed their

trades before expiration let's see how

each trader fared trader AIDS accounts

started at five thousand five hundred

dollars and ended with five thousand

seven hundred fifty dollars for a return

of four and a half percent trader B

started with five thousand five hundred

dollars and ended with five thousand two

hundred fifty dollars for a loss of four

and a half

percent you can see how quickly profits

and losses on a futures trade can change

with just small moves in the underlying

index remember gains or losses on

futures positions may exceed the initial

margin requirement but now that you've

seen how margin works you can better

anticipate potential outcomes and plan

accordingly

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