The margin account provides the capital to finance futures positions. It is a direct measure of the customer's equity so it is important to properly manage margin funds both in terms of monitoring the level of equity in the account and getting the most out of your margin dollars.
Monitoring Margin Funds
When you first open a futures trading account, you deposit money into the margin account. Since there are no futures positions outstanding, all of the margin is available or excess margin. (Excess margin is the amount of money in a margin account left over after taking into consideration margin requirements and the net profit or loss of all outstanding futures positions.)
Excess margin is reduced as:
- new futures positions are initiated since funds are used to meet margin requirements,
- options are purchased since this leaves less cash in the account,
- there is a combined net loss on all outstanding futures positions calculated daily using futures settlement prices, or
- a withdrawal is made from the margin account.
Excess margin is increased as:
- futures positions are closed since funds are released from margin requirements,
- long option positions are sold since the cash value of the options is deposited into the account,
- there is a combined net gain on all outstanding futures positions calculated daily using futures settlement prices, or
- a deposit is made to the margin account.
Because the level of excess margin can fluctuate daily, a trader should form the habit of monitoring the equity in their account at the end of every day. Monitoring the equity in your account is not difficult. It requires you to know the margin requirements of a futures position, and thereafter to keep a running tally of the net profit/loss of all open futures positions.
Example:
A customer who has recently opened a futures trading account with $15,000 buys two August Nymex (COMEX) gold futures contracts at a price of $385.50 per ounce. Assume that initial margin on a gold futures contract for traders (as opposed to hedgers) is $1,350 per contract for a total margin requirement of $2,700. This money is deducted from the margin account, leaving a residual $12,300 as excess margin (not including commission and other fees which are also deducted from the account). Since the trader now has an open futures position, it is marked-to-market at the end of every trading day, beginning with the day of the futures trade. Say, for example, that August gold futures settled the day at $383.75 per ounce. There is an implicit net loss on the gold futures position of $1.75 per ounce, or $350 in total (calculated as $1.75/ounce x 100 ounces/contract x 2 contracts). This net loss is deducted from the excess margin, leaving $11,950 in excess margin.