Initial Margin

The initial margin is the minimum amount of collateral a trader must deposit to open a futures contract or short option position. It is typically a small percentage of the contract’s notional value (5–20%), enabling leverage. If daily losses cause the account to fall below maintenance margin (usually 70–80% of initial margin), a margin call is issued, requiring the trader to deposit more funds or close the position.

How initial margin works

To trade a December oil futures contract (1,000 barrels = $70,000 notional at $70/barrel), your broker requires $3,500 initial margin.

You deposit $3,500. This gives you the right to control $70,000 of oil exposure. You have 20:1 leverage ($70,000 notional / $3,500 margin).

If the price moves $1/barrel, your position gains or loses $1,000. If it moves against you by $3.50, you have lost $3,500—your entire initial margin.

Initial vs. maintenance margin

Initial margin is what you deposit to open the position.

Maintenance margin (typically 70–80% of initial) is the minimum required to keep the position open. If mark-to-market losses push equity below maintenance, you face a margin call.

Example:

• Initial margin: $3,500
• Maintenance margin: $2,500 (70%)
• Daily loss: −$1,500
• Remaining equity: $3,500 − $1,500 = $2,000

You are still above maintenance ($2,000 > $2,500)? No—$2,000 < $2,500, so margin call. You must deposit $1,500 to restore equity to $3,500.

Leverage and risk

Initial margin enables leverage, amplifying both gains and losses. A 1% move in the underlying can translate to a 10–20% gain or loss on the margin deposit.

This is why futures trading is risky. You can lose your entire margin on a relatively small market move.

Setting initial margin levels

Clearing houses (CME, Eurex, etc.) set initial margin based on:

• Volatility: Volatile contracts require higher margin
• Contract size: Smaller contracts might have lower $ requirements
• Risk: Illiquid or complex contracts require higher margin

During market stress, margin requirements spike. During the 2008 crisis, some margin requirements doubled or tripled.

Types of margin accounts

Hedging margin: Producers, consumers, and corporates hedging operational risk often get reduced margin because their hedge is less risky (they have physical exposure).

Speculative margin: Pure speculators pay full initial margin.

Portfolio margin: Large, sophisticated traders with diversified positions may get reduced margin based on portfolio-level risk.

See also