Margin Call Calculation

This document is to provide a discussion and reference material on the general overview process of calculation
margin in Futures and or Options on Futures. This is prepared as a reference document, but cannot be relied on
as complete for all margin issues. This information is subject to change without notice. It is believed to be
accurate but is not guaranteed to be fully encompassing of all margin issues.

Futures Margin.

To start with we should look at the definition of Margin and Margin Call when used with Futures trading
which includes Options on Futures and Forex trading.
Margin
An amount of money deposited by both buyers and sellers of futures contracts and by
sellers of option contracts to ensure performance of the terms of the contract (the
making or taking delivery of the commodity or the cancellation of the position by a
subsequent offsetting trade). Margin in futures is not a down payment, as in securities,
but rather a performance bond.

Margin Call
A call from a clearing house to a clearing member or from a broker or firm to a
customer, to bring margin deposits up to a required minimum level.
Margin on Futures are set by the exchange. They are subject to change at any time by the exchange.
Any clearing firm has the right to increase any margin requirements as they so choose. PFG Best usually
maintains the Exchange Margin rates, which are then referred to as “Exchange Minimums”. All margins are
based on a per contract basis.
Margin has two levels: First is called Initial, and second is called Maintenance. The basic margin on
Futures works as follows:
An account is to have a minimum of Initial margin in the trading account to be equal to or in excess to Initial
Margin when a trade is initiated. After the first day is complete then subsequent days the Maintenance
Margin will be in effect. After the first day the position is on and as long as the value of the account stays
above Maintenance Margin there is no margin call issued. If the market should go against the position, and
the settlement value at the close of the day is below the Maintenance value, then there is a call issued to
bring the value of the account up to the Initial margin value.
Available funds in an account (futures only) are the excess margin in an account up to the value of the
ledger balance. This means if an account has a large open trade profit, you can only take out funds up to
the cash balance of the account. Strangely enough, if the account has a large open profit and the account
ledger balance is at a Zero balance, funds cannot be withdrawn, but the open equity can be used to add
additional futures contracts.
Adding positions: When an account has futures positions on, the margin calculation is based on the
Maintenance level after day of entry of any position. If any additional future position is added, then the day
that the additional position is added, ALL positions in the account (previous and new) are subject to initial
margin values for that day. The Maintenance margin reverts back into play only when there is no new
position activity for a day.
Note that Margins do not change as the value of the position increases or decreases. The value of the
futures contract changes with market changes and therefore the value of the account will change
accordingly without changing the margin requirements. (Margin can change if the exchange itself changes
the margin requirements, or if the Clearing Firm enacts a change. If this happens, margin changes on all
current positions held, not just new positions after thee change.)
Related market margin adjustments: There are margin values for outright Long or Short positions.
Spread positions, and margins will vary because of inter-market relationships. Example: a Long Gold and a
Short Silver will indicate reduced margin than the initial and maintenance requirements of both the gold and
silver individually if traded on the same exchange.
Master accounts: If there are multiple accounts with the same ownership, a Master account can be created
that will take into account all positions in the various related accounts which will enable the lowest (and
most accurate) margin requirements for the multiple accounts.
Day Trading:
Day trading is the term applied to a trade that is entered and exited the same trading session. Margin
discussed in the dialog of this article is generally regarding margin that is required for positions held past the
ending time set for each market’s daily trading session. There is margin required for day trading. The
margin required is not different than what is set by the exchange, however a general rule of thumb is that
the clearing firm holding the trading account will usually only require 50% or less of the exchange required
margin for day trading.
What triggers a Margin Call trading Futures:
This will describe common triggers that result in a margin call trading Futures. Note: If Options are held
there will be other calculations involved.
1. A margin call will be generated on the day any new position is established and the Liquidation Value (LV)
of the account at the end of that market day is less than the initial margin required for the entire position
held.
2. If there is no trade activity and the LV of the account drops below maintenance level at the end of any
day, there will be a margin call triggered.
The amount of the call will be at a minimum the amount of funds needed to bring the account value to or
above the Initial Margin required for the position held.
Caution: It is easy to have a position on that has resulted in the account LV being below the initial margin
and yet above the maintenance margin and not being on call. Simple example is if an account that is
holding futures and the LV is below initial margin and close to (yet above) maintenance margin and a new
position is established a new margin call will be generated. The margin call will reflect the initial margin for
the new contracts plus what ever it takes to bring the account to a value above the initial margin level.
Therefore the true available margin is only the amount above the LV is above the Initial margin requirement.
Not the amount that is the difference from the LV to the maintenance. The difference between LV and the
maintenance margin is the amount of account loss before getting a margin call triggered if no new positions
were added.

Options Margin: Long Options

When you buy an option (Call or Put) you have unlimited profit potential with a set amount of risk. When
buying options you do not have margin, you have cost. You pay for the premium (purchase price) plus any
transaction costs. You will never have any additional cost for simply buying the long option (Call or Put)
option.

Short Option Margin Calculation & Application:

To start with, let me say that Margins on Writing Options (selling) is a moving target! Like futures,
options have Initial and Maintenance margin values.
When you write (sell) an option, you have a set amount of profit potential (the amount of premium received
minus the transaction costs) and unlimited (unknown) risk.

The Margin on short option is made up of two parts. One part is the SCAN Risk (SR) and the second is
the Short Option Value (SOV) also called premium. Margin = the combined total of the SR plus SOV.

SCAN Risk is the calculated amount of risk that the option possesses on any given day. It is
calculated by the exchange and it usually changes every day. It’s going to be less than the required margin
of underlying futures contact, unless the option is the money. If the option is in the money the margin will be
generally be equal to that of the futures contract margin. Because the SR and SOV can change and usually
does change every day the margin required to sell the option or hold a option also changes every day and
can be very volatile.

The premium received (the price of the filled order) stays constant, but the SOV will change every day
and so will the SR. Since both the SR and SOV change every day, one can see that Short Option Margins
are volatile! The daily change of short option value is called “Marked to the Market” as it takes on a new
value every day.

Total Equity is the amount of the account balance in the account. Premium from the sale of an option is
added to the account balance and this is called Total Equity. (If there are futures in the account the open
trade equity is part of the total equity as well. Also, TE is different than LV when determining how Margin
requirements are calculated.)

Adding positions: When an account has option positions just like the futures described in the above
section, the margin calculation is based on the Maintenance level after the last day of entry of any additional
position. If an option position is added, then the day that the additional position is added, ALL positions in
the account (previous and new) are subject to initial margin values for that day. The Maintenance Margin
reverts back into play only when there is no new position activity for a completed market day.

Funds that are in excess of the Margin value (and greater than the account cash balance) are available as
withdraw-able funds.
What triggers a Margin Call where the account is holding only short options.
This will describe common triggers that result in a margin call holding and trading short Options on Futures.
1. A margin call will be generated on the day any new position is established and the Total Equity (TE) of
the account at the end of that market day is less than the initial margin required for the entire position held.
2. If there is no trade activity in the account and the TE drops below maintenance level at the end of any
day, there will be a margin call triggered.
The amount of the call will be at a minimum the amount of funds needed to bring the account value to or
above the Initial Margin required for the position held.
Caution: It is easy to have a position on that has resulted in the account TE being below the initial margin
and yet above the maintenance margin and not being on call. Simple example is if an account that is
holding Short Options and the TE is below initial margin and close to (yet above) maintenance margin and a
new position is established a new margin call will be generated. The margin call will reflect the initial margin
for the new contracts plus what ever it takes to bring the account to a value above the initial margin level.
Therefore the true available margin is only the amount above the TE is above the Initial margin requirement.
Not the amount that is the difference from the TE to the maintenance level. The difference between TE and
the maintenance margin is the amount of account loss before getting a margin call triggered if no new
positions were added.
How can a margin call be satisfied?
Margin calls are satisfied by a. adding funds or b. reducing positions so the account status will be above the
Initial Margin level at the end of the day.
Depending on each account individual account circumstances which include the size of the margin call and
the current market conditions a wire may be required, and in some cases a check may be sent. Discussion
of satisfying a margin call is a discussion that the account holder has to have with their broker when a
margin call is issued.

For funding instructions, please click here.

The chart below is what can be expected if there are positions in a trading
account with no additional trading activity.

Foremost Trading LLC
28 N. Bennett St. Geneva, IL 60134
Toll Free: 1-888-818-0880
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Web Site: www.ForemostTrading.com
Foremost Trading LLC offers trading services for both Futures and Forex markets.
Note: Futures, Forex and Option trading involves substantial risk, and may not be suitable for everyone. Trading
should only be done with true risk capital. Past performance either actual or hypothetical is not indicative of future
performance.