Margins, Risk & Leverage

Information Crucial to Trading Success

Trading futures and options on futures involves a large degree of leverage. Successful traders must have a strong understanding of how this leverage works, when to apply it and what consequences it may have on your risk. This leverage comes to us in the form of performance bonds; also known as margin requirements.

In order to effectively understand leverage, we must understand margins. Here is an example of how margins work (the process varies slightly depending on the exchange):

  • We wish to trade 1 S&P Emini Contract (exchange symbol: ES)
  • The ES futures contract is traded at the CME Group on their CME Globex system
  • Click on the link to be taken to the Performance Bonds/Margins page of the CME Group website.
  • We see that in order to initiate a trade of 1 contract of ES, the exchange expects us to have at least $5,060 in our trading account. $4,600 must be maintained in the account to hold that contract without having to either close the position or deposit more funds (a margin call). This means that once the trade is initiated, we can lose 9 pts without having to deposit more funds. Assuming we are daytrading, we don’t need the entire amount in our account. We can trade that contract for a lot less depending on the margin leverage your broker provides.
  • Maintenance margin must be available in the account by 4:00 CT and the amount your account is debited or credited for holding this position is based on the settlement price that day. Hence, if we do not have enough to cover the maintenance margin, we would be on margin call.
  • Note that intraday margins are different. Intraday margins are set by your broker.
  • Intraday margin varies based on our traders specific experience levels, trading plans, and needs. In general we start our traders out with 50% of Initial Exchange margin for their intraday margin. As of 08/07/2014 the initial exchange margin is $5,060 for every one ES contract. That means that with intraday margin, Stage 5 traders could trade one ES for every $2,530 ($5,060 * 50%) they have in their account. On a $10,000 account Stage 5 traders could trade up to 3 ES ($10,000 / $2,530) contracts at any one time. The lower the margin, especially intraday margins, the higher the leverage and riskier the trade. Leverage can work for your as well as against you, it magnifies gains as well as losses. Margin rates for CME products can be found by clicking here. For ICE, they are listed here. For Eurex, they can be found here.

 

VIRTUAL CURRENCY RISK DISCLAIMERS

The growth of the virtual currency market has received a lot of interest and attention. Due to their nature and the risk of loss that could arise from trading these products, the CFTC and NFA have published Investor and Customer Advisory Notices on the subject.

Customer Advisory: Understand the Risks of Virtual Currency Trading

NFA Investor Advisory—Futures on Virtual Currencies Including Bitcoin

We encourage you to read these notices. Should you have any questions, you can contact the CFTC, NFA, Stage 5 Trading Corp. customer service or your broker.

STAGE 5 TRADING IS A MEMBER OF NFA AND IS SUBJECT TO NFA’S REGULATORY OVERSIGHT AND EXAMINATIONS. HOWEVER, YOU SHOULD BE AWARE THAT NFA DOES NOT HAVE REGULATORY OVERSIGHT AUTHORITY OVER UNDERLYING OR SPOT VIRTUAL CURRENCY PRODUCTS OR TRANSACTIONS OR VIRTUAL CURRENCY EXCHANGES, CUSTODIANS OR MARKETS.

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