Futures Margin — Definition

Futures Margin is a cash deposit a futures trader makes in order to open a futures position no matter long or short.

What Is Futures Margin?

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As futures contracts are settled at the end of each day (known as marking to market ), profits are added and losses are deducted from this initial margin amount. When the initial margin amount is reduced to a certain level (known as the Maintenance Margin) due to losses, the broker will ask the trader to top up the margin (known as Variation Margin) back up to the initial margin amount in what is known as a margin call.

Relationship Between Initial Margin, Maintenance Margin, Margin Call and Variation Margin

Now that you had an overview of what margin is in futures trading, lets take a closer look at the different aspects of futures margin mentioned above; Initial Margin, Maintenance Margin, Variation Margin and Margin Call.

Initial Margin

Initial margin is the cash deposit required to be put forward when opening a new futures position which is determined based on a percentage of the full contract value. Opening a futures position means to go long or go short on futures contracts. Initial margin applies in futures trading no matter if you are long or short a futures position. This is unlike in options trading where you actually receive money instead of pay money when putting on a short options position.

Initial margin is calculated based on a percentage of the total value covered under the futures contracts. This percentage varies according to the futures market that you are trading. In single stock futures trading, the required initial margin is 20% of the value of the contract in the USA. Initial margin for more index futures and commodities futures around the world are calculated using a system known as SPAN Margin which may vary from day to day.

Initial Margin Example:

Initial margin required = $1000 x 20% = $200

Initial margin is a deposit made. This means that it remains your money unless deducted due to losses. As all futures contracts are marked to market daily, which means that they settle their wins and losses on a daily basis in order to control risk, wins are added onto your initial margin deposit while losses are deducted from your initial margin deposit.

Initial Margin Example:

Following up from the above example. Assuming at the end of the first trading day, XYZ stock rises to $10.10.

Margin balance = $200 + $100 = $300

As you can see in the example above, XYZ rises $0.10 on the first day of trade and the very same day, those profits on that 1000 shares are added directly onto your margin balance. Here you can see the leverage effect of futures trading as well, making a big 50% profit on your invested capital of $200 on a mere $0.10 gain on the stock. However, leverage cuts both ways. Lets see what happens when the stock falls.

Initial Margin Example:

Following up from the above example. Assuming at the end of the second trading day, XYZ stock drops to $9.90.

Maintenance Margin

So, how low can your margin balance go before your broker becomes uncomfortable? When its lower than the Maintenance Margin required of the position.

Maintenance Margin is the minimum amount of margin balance that you need to have in your account in order to keep your futures position valid. Maintenance margin is the minimum amount of money which your broker or the exchange require you to have in your account so that losses can be deducted from it. Anything lower than that increases the risk that you may not have enough money to be deductible against losses.

Maintenance margin for trading Single Stock Futures in the US market is 20% of the cash value of the futures contract. Yes, it is the same level as the initial margin. Maintenance margin requirement would vary according to the specific market you are trading in.

Once your margin balance falls below maintenance margin level, you will receive what is known as a Margin Call from your broker.

Margin Call

The most dreaded term in futures trading is definitely Margin Call. A margin call is a call from your broker requiring you to top up cash into your account when your margin balance for your futures position drops below the maintenance margin level.

The additional amount of cash that is needed to bring your margin balance back up to the initial margin level from the maintenance margin level is known as the Variation Margin. This means that you will receive a margin call to deposit variation margin into your account to bring it back up to the initial margin level when the margin balance drops below maintenance margin.

Initial Margin Example:

Following up from the above example.

Since maintenance margin for single stock futures is the same level as the initial margin, the margin balance of $100 remaining is below the maintenance margin of $200. You receive a margin call from your broker to top up:

Variation Margin = $200 — $100 = $100

Topping up $100 will bring your margin balance back up to $200, which is the initial margin level.

Read the full tutorial on Margin Call