Trading margins are deposits held by brokers to protect both the trader and broker from potential losses on an open trade. By using these margins, day traders are able to control positions much larger than their account balance through leverage.
For example, the current day trading margin for the E-mini S&P 500 (ES) is $500. With the ES trading around 2,375 points, and each point valued at $50, the actual cost for one E-mini S&P contract is nearly $119,000.
Futures trading margins consists of three margin types:
- Intraday margin
- Initial margin
- Maintenance margin
This article will focus on intraday margin, while initial and maintenance margins (commonly referred to as exchange margins) are covered in subsequent posts.
What Is Intraday Margin?
At its most basic, the intraday margin of a product represents the minimum balance an account must maintain per contract while in a trade.
Let’s start by looking at the E-mini S&P 500 (ES) and crude oil (CL), two common futures instruments with different margin requirements. The differing margin requirements for the ES and CL primarily stem from the unique characteristics of each instrument.
There is generally less liquidity and higher volatility in the CL, so a higher margin requirement is necessary to protect against large moves in the opposite direction of a live position.
A $1,000 futures trading account trading the CL would be in debit, or at zero, after a move of 100 ticks (each tick is $10). While uncommon, moves of that magnitude do happen on occasion and can be fast enough that both the trader and brokerage risk management team are unable to liquidate the position.
Since the ES is a more liquid market and has more volume, an equally large move of 100 ticks would generally occur over a longer period of time. Because more contracts would be traded in a 100 tick ES move, traders have greater opportunities to exit a position before an account is driven into debit; thus the day trading margin for the ES is less than the CL.
Intraday Margin Example
To demonstrate how intraday margin works, let’s examine a hypothetical account owned by Jane Smith with a $10,000 balance.
Currently, the intraday margin requirement for an ES contract is $500 and the CL is $1,000. As a result, Jane could choose to trade:
- One contract of the ES using $500 of her $10,000 account balance, leaving $9,500 in excess margin
- One contract of the CL using $1,000 of her $10,000 account balance, leaving $9,000 in excess margin
While unadvised, Jane could theoretically trade up to 20 contracts of the ES or 10 contracts of the CL at once based on her account size. Should this occur, Jane would be trading at “full leverage” and would violate intraday margin requirements if the market moved one tick against her.
A market move in the opposite direction of an open position at full leverage would likely trigger a margin call from the brokerage trade desk. Under this circumstance, Jane would have the opportunity to satisfy the margin requirements and continue to trade by depositing the necessary funds or face liquidation from the trade desk.
Should liquidation occur, Jane would be responsible for the losses of the trades in addition to a liquidation fee. Traders should always take note of the different intraday margin requirements of the contracts they are trading.
