Margin is a performance bond that a trader uses to ensure the performance of the contract terms. It typically represents a fraction of the contract value and serves as a good faith deposit to meet the obligations of holding a position in the market.
There are different types of margin usage available in futures trading and it is important for traders to understand what each represents in order to properly manage their account. Here is an overview of the different margin types applicable to futures trading:
Day margin is the minimum requirement to day trade a contract, which means opening and closing the position within the same trading session and not carrying a position past the session’s close. This reduced requirement increases leverage, which increases the risk associated with futures trading, so it is very important to know and monitor your day margin usage in relation to your overall account management.
Initial margin is the amount required to open and hold a position past a session’s close, also known as holding a position overnight. Initial margins are set by the exchange clearinghouses and vary by product and market volatility. As market conditions and product prices change, the clearinghouse will raise or lower margins, so it is recommended that traders check margin rates for the products they trade prior to placing new trades.
After a trader has met the initial margin requirement, the margin requirement will be reduced to a maintenance level thereafter until the position is closed. If the liquidating value of the account drops below the required amount of maintenance margin at daily settlement time, a margin call would be issued and the trader would need to send additional funds, close part or all of their position, receive market appreciation of their position, or a combination of those methods that brings the account equity to the required level.