1. Beginner's Guide To E-Mini Futures Contracts: Introduction
  2. Beginner's Guide To E-Mini Futures Contracts: What Are The E-Minis?
  3. Beginner's Guide To E-Mini Futures Contracts: E-Mini Characteristics
  4. Beginner's Guide To E-Mini Futures Contracts: E-Mini Specifications
  5. Beginner's Guide to E-mini Futures Contracts: Popular E-mini Contracts
  6. Beginner's Guide To E-Mini Futures Contracts: Who Trades The E-Minis?
  7. Beginner's Guide To E-Mini Futures Contracts: Trading The E-Minis
  8. Beginner's Guide To E-Mini Futures Contracts: Other E-Mini Contracts
  9. Beginner's Guide To E-Mini Futures Contracts: Volume and Volatility
  10. Beginner's Guide To E-Mini Futures Contracts: Margins
  11. Beginner's Guide to E-Mini Futures Contracts: Rollover Dates and Expiration
  12. Beginner's Guide To E-Mini Futures Contracts: Brokers
  13. Beginner's Guide To E-Mini Futures Contracts: Tax Advantages

Margin is essentially a loan that a brokerage firm extends to you so you can buy trading instruments. It allows you to enter larger positions than you would otherwise be able to with a cash account. That’s because it provides leverage – which amplifies both wins and losses. As such, you should use margin carefully to avoid catastrophic losses.

In addition to the leverage afforded, margin allows you to sell short, where you attempt to profit from falling prices. When you sell short, you start a trade by borrowing contracts from your broker (using margin) and then selling them. You buy back the contracts (known as "buying to cover") when you want to close the trade. (For related reading, see Short Selling Tutorial.)

Why E-Minis Require Margins

The concept of margin differs between stock, forex and futures because stock and forex trading involves buying something tangible (part of a company or foreign currency) and futures trading involves buying or selling a contract whose obligation will be met at a future date. Margin for stock and forex trading is defined as borrowed money, whereas futures margin is considered an initial deposit or an "earnest money" deposit. If you have a margin account, you pay interest on the amount of money used as margin. The margin interest rates vary depending on the current broker call rate and how much money you borrow.

Minimum Margin

You have to deposit a certain amount of money called minimum margin before you can trade on margin or sell short. The minimum margin requirements for futures contracts are set by the exchanges that offer these contracts. Keep in mind that this amount is only a minimum – some brokerage firms may require you to deposit more.

Initial Margin

Initial margin is the margin that traders must pay for with their own money to enter a position. Also known as futures requirements, these rates vary by contract, contract date and brokerage firm. Initial margin is a percentage of the full contract value of a position and is used to ensure that traders have enough cash in their accounts to cover losses. Initial margin is set by the exchange and change in response to market activity, such as:

  • Changing volatility
  • Shifts in supply and demand
  • Changes in fiscal policy
  • Major geopolitical events
  • Natural disasters

In general, initial margin rates decrease when daily price moves are less volatile and increase during periods of increased volatility. Individual brokerage firms can require higher minimum margin requirements (tighter restrictions) than the exchanges set in order to limit their own risk exposure. 

Maintenance Margin

Maintenance margin is the minimum balance you have to maintain in a margin account. Here’s an example. Imagine you enter a position to buy (go long) the December 2017 ES when the contract is trading at 2,578.00 points. The exchange requires an initial margin of $4,900 and a maintenance margin of $4,500. If price fluctuations in the ES bring your account balance under $4,500 (the maintenance margin amount), you would have to deposit additional funds to bring the account value back to the required initial margin (you’d also get a margin call; see below). The potential gains and losses of the position fluctuate every time the settlement price of the contract changes. The final gain or loss is determined when the position is closed or when the contract expires. (For more, see What Does it Mean When I Get a Maintenance Margin Call?)

Margin Calls

You’ll get a margin call if your account falls below the maintenance margin amount. A margin call is a demand from your broker to add money to your trading account to meet the maintenance margin requirements. If the demand isn’t met, your broker can close out any open positions in order to bring the account back up to the minimum value. Your broker can close the position(s) without notifying you in advance. Even if your broker offers you time to increase the equity in your account, they can still sell off positions without consulting you. You may be able to avoid a margin call by closing out the losing position(s) if your account is approaching the maintenance margin level.

 

Minimum Margin

Initial Margin

Maintenance Margin

Margin Call

Amount you have to deposit in order to trade on margin and sell short.

Amount you need to pay with your own money to enter a trade.

Amount you have to maintain to avoid a margin call.

A demand to bring your account back up to the maintenance margin level.

 

Pattern Day Traders

Although futures traders are not subject to FINRA's Pattern Day Trading rule (which requires a minimum account size of $25,000), day traders may have different margin requirements than traditional overnight traders. If you’re identified as a pattern day trader – defined as someone who makes four or more day trades within five business days – your broker may enforce special margin requirements on your day trading account(s).

Margin Trading Risks

Trading with margin involves a number of risks. The Financial Industry Regulatory Authority (FINRA) lists the followings risks you should be aware of: 

  • The firm can force the sale of open positions to meet a margin call.

  • The firm can close positions with contacting you.
  • You are not entitled to choose which positions are closed to cover a margin call.
  • You are not entitled to extensions on margin calls.
  • You can lose more funds than you deposit in the margin account.

Beginner's Guide to E-Mini Futures Contracts: Rollover Dates and Expiration
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