FUTURES TRADING ESSENTIALS
What is Margin in Commodity Futures Trading?
When trading commodity futures contracts, margin is the amount of funds that must be available in your trading account to hold a futures position. Unlike stock or equity margin, futures margin is not a loan – think of it as a performance bond. In simple terms, it’s the dollar amount you must have available in your futures trading account to open and maintain a specific futures contract.
It is also important to understand that margin is not the amount you are risking on a trade. Your profit or loss is determined by the movement of the futures contract and the value of those price movements – not by the amount of margin required to trade the contract.
There are different types of margin:
- Initial Margin: The amount of funds you must have available in your trading account to carry a futures position beyond the market close. Any open futures positions held past the market close must meet the full Initial Margin requirement for each contract held.
- Maintenance Margin: The minimum account equity required beginning with the second day a futures position is held. Maintenance Margin is typically 10% less than Initial Margin. If account equity falls below the Maintenance Margin requirement level, a margin call will issued and you will be required to either liquidate positions and/or deposit funds to bring your account balance back up to or above the Initial Margin level – not the Maintenance Margin level.
- Day Trade Margin: A reduced margin requirement that some futures brokers offer for positions opened and closed during the same trading session. Day Trade Margin requirements are set by the futures broker and can be substantially lower than futures exchange-set margin requirements.
For example, suppose a futures contract has a $500 Day Trade Margin and a $4,000 Initial Margin. A futures trader will be able to trade that contract during the trading session with only $500 in available funds per contract. The $500 margin requirement does not mean the trader is risking only $500; profit or loss is determined by the movement and contract value of the futures contract being traded. If the position is still open when the market closes, the account must have the full $4,000 Initial Margin available per contract.
Initial and Maintenance Margin requirements are established by the futures exchanges, such as the CME Group, and can change based on market conditions. Day Trade Margin requirements are determined by the futures broker. Insignia Futures & Options makes its Day Trade Margin requirements available throughout the entire trading session, including overnight trading hours.
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Futures Margin Types Explained
| Margin Type | Purpose | Example: E-mini S&P 500 Futures |
|---|---|---|
| Initial Margin | Amount of funds required to open a futures position | $22,000 |
| Maintenance Margin | Minimum balance required to hold a position | $20,000 |
| Day-Trade Margin | Reduced margin requirement for intra-day trading | $500 |
Amounts shown are examples only. Actual margin requirements are subject to change without notice.
How Margin Works
Margins are set by the futures exchanges based on volatility and market conditions.
For Position trading – holding a futures contract for longer than one trading session, a trader will need to have the Initial margin requirement available in their trading account to establish a position. Using the example above for the E-mini S&P 500 futures contract, $22,000 would be needed per contract.
Beginning with the next trading day, the futures exchange will lower the margin requirement to hold this position down to the Maintenance margin requirement. Is this example, $20,000. This gives the trade a little more room for prices to fluctuate without generating a margin call. The Maintenance margin will remain in effect for as long as the position is held.
If at any time, account equity falls below the maintenance margin level, a margin call would be triggered. The trader would then be required to either deposit funds to bring their account balance back up to the Initial margin requirement or close their position.
In addition to Initial & Maintenance margin requirements, futures brokers may also offer their clients intraday “Day-Trade” margins. These margin requirements are typically much lower than the exchange Initial margin requirements and offer traders the ability to trade futures contract with much less capital. In this example, only $500 to trade an E-mini S&P 500 futures contract. Keep in mind, Day-Trade margins apply only within the same trading session. If a position was held past the current day’s trading session, then the full, Initial margin requirement would apply.
Frequently Asked Questions
Q: What is a margin call?
A: A margin call occurs when account equity falls below the maintenance margin, requiring additional funds or position reduction.
Q: Who sets futures margin requirements?
A: Futures exchanges such as the CME Group set minimum margin requirements. Futures brokers set intraday, Day-Trade margins at their discretion.
Q: What is the difference between margin in stocks and futures?
A: Stock margin is a loan from a stock broker, while futures margin is similar to a performance bond, ensuring contract obligations.
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