Futures trading gives traders opportunities for large profits due to the amount of margin a trader must put up for a futures contract. The contract value may be $100,000 or more, yet the market deposit could be 5 to 10 percent of the contract value. This leverage of controlling a large amount of the underlying commodity or security with a smaller margin deposit is what allows profitable futures trading.
Exchange Margin Requirements
The futures trading exchanges set initial and maintenance margin requirements for each type of futures contract that trades on the exchanges. For example, the margin for trading corn will be different than the margin for the e-mini S&P 500. The initial margin amount is the amount a trader must place with the broker when a futures trade is initiated. The maintenance margin is the minimum margin value a trader must maintain on an open trade. For example, the current initial margin amount for the e-mini S&P 500 contract is $5,000 and the maintenance margin is $4,000.
Mark to Market
The futures markets trade nearly around the clock during the business week. However, the exchanges close for about 30 minutes each day in the afternoon to adjust trader margin balances for the results of the day. If an open futures trade was up for the day, the excess money is deposited into the trader's account. If a trade was down, the loss is subtracted from the margin deposit and compared to the maintenance margin. If the remaining margin balance is below the maintenance margin, the trader will be required to put more money in the margin deposit.
Consider, for example, two traders trading the e-mini S&P 500. One is long one contract and one is short a contract. When trading stops for the day, the value of the S&P 500 futures contract has increased by $1,500. The long e-mini trader now has a margin deposit worth $6,500 from the gain. The extra $1,500 will be deposited to her account. The short e-mini trader has seen his margin deposit erode to $3,500, below the maintenance margin of $4,000. He must put an additional $500 on margin deposit to bring the amount up to the maintenance margin level.
Day Trading Futures
A day trader has futures trading positions open only during the market day and all positions are closed by the end of the work day. There is no mark to market since no trades are open in the trader's account. Many futures brokers allow day trading with less than the exchange required margin deposits. For example, the OptionsXpress brokerage firm allows futures day trading with margins of either 25 or 50 percent of the exchange established limits. Other firms have flat day-trading margins such as $500 for actively traded contracts.
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