Many of those new to trading will have difficultly understanding the concept of a margin. This short article puts things in perspecitive.

When you hire a car, you pay a deposit. When you take out a home loan, it is normally secured by a mortgage. Why do you have to do this? It is because there is a liability that may have to be covered. You might smash the rental car or you might be unable to meet your loan repayments.

Futures and options trading is no different. Buying or selling futures or selling options leaves you open to a liability. Given this, the exchange clearing house and your broker will take measures to ensure you are able to meet your financial requirements, should the position move against you.

There are a number of different methods of covering this liability, depending on the underlying asset itself and the exchange on which it is traded. The requirements may differ from exchange to exchange but generally speaking, a holder of a futures contract or a short option will be required to lodge and maintain a deposit called a “margin”.

A margin is like a deposit that is revalued every day, based on specific risk calculations. If for example you are short out-of-the-money call options and the market kept moving against you, your daily margin would increase.

Generally speaking, the clearing house of the exchange will set the deposit or margin required for futures or short options but in most countries, a broker has the right to increase the requirements for one or all of its clients.

Before trading in a certain market you should speak with your broker and check out the exchange website regarding requirements for trading in short options.

For future options, just remember that a margin can never get any great than the corresponding futures margin since the delta (risk) of an option can never be greater than 1.0. However, it is your mark-to-market valuation that can cause problems if the market is going against you.

You can think of a margin as a measure of your risk at a single point in time, but not a measure of your total risk moving forward.

 

Disclaimer: There is a Risk of Loss in Futures Trading
DISCLAIMER HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. THE RISK OF LOSS IN FUTURES TRADING CAN BE SUBSTANTIAL. YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. PAST PROFITS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THERE IS A RISK OF LOSS IN FUTURES TRADING.THE INFORMATION CONTAINED HEREIN HAS BEEN OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, HOWEVER IT CANNOT BE GUARANTEED AS TO ACCURACY OR COMPLETENESS, AND IT IS SUBJECT TO CHANGE WITHOUT NOTICE. IT SHOULD NOT BE ASSUMED THAT THE SEASONAL PRICE TENDENCIES SHOWN HEREIN OR THAT THE SUGGESTIONS REGARDING THEIR USE WILL BE PROFITABLE OR THAT THEY WILL NOT RESULT IN LOSSES. PROTRADER LLC, ITS MEMBERS OR EMPLOYEES ASSUME NO LIABILITY IN CONNECTION WITH THE USE OF THE INFORMATION CONTAINED HEREIN.