Futures Margin call

G

greggg

Is it possible to owe more than the cash value of your account?

If so, could someone please proved a scenario.

I know you can pay the amount of the margin call to have your account released from call status. Or, you can liquidate your positions.

If you choose to liquidate your positions what happens to the account. Can you keep trading? Do they come after you for the amount of the margin? I've never seen these questions answered in plain English. :->
 
Greg:

Since you are asking in the Index Futures thread -

Absolutely-

You have opened an account with a broker that allows $500 per contract "margin" on an ES contract. You deposit $5,000.

You go long 8 ES at some value, let's say 1300. You've used up $4,000 of your available margin (8 x $500). Each point move in the ES is $400 (8 x $50).

A hurricane in the Gulf of Mexico has shutdown the oil rigs for the last two days and the oil platform operators announce they will remain offline for five more days. Oil has increased $8/barrel. ES reacted down 5 points and is moving in a 1 point range. You are down 8 ES x $400 = $3,200. You have an $1,800 "reserve". No problem! (other then you should never get this exposed in my opinion)

At 2:15 PM the Federal Reserve announces that it is raising the Federal Funds rate by 1%. The market reacts and ES moves down 20 points within seconds.

You are now down 25 points. 25 x $400 = $10,000.
Your broker liquidates your position. You absolutely have a debt to them of $5,000. Send them $10,000 and try again with another $5.000. This time just trade 1 ES at a time until you get $50,000 in the account.


Jack
 
Quote from JackR:

Greg:

Since you are asking in the Index Futures thread -

Absolutely-

You have opened an account with a broker that allows $500 per contract "margin" on an ES contract. You deposit $5,000.

You go long 8 ES at some value, let's say 1300. You've used up $4,000 of your available margin (8 x $500). Each point move in the ES is $400 (8 x $50).

A hurricane in the Gulf of Mexico has shutdown the oil rigs for the last two days and the oil platform operators announce they will remain offline for five more days. Oil has increased $8/barrel. ES reacted down 5 points and is moving in a 1 point range. You are down 8 ES x $400 = $3,200. You have an $1,800 "reserve". No problem! (other then you should never get this exposed in my opinion)


Jack
More...


Jack,

Thanks for your response. Lets say what I quoted above is the case. What happens if this trade is held over night.
How does the over night margin rate effect it?
 
Another scenario I have heard: If there is catatrophic failure at your excahnge, or your broker, then at reopen the position has moved drastically against you (lets say less thatn your deposit and margin ie:-10,000) then you are liable for this loss.

Always think about this situation and how would you go about hedgin your unreachale position with another excange/instruments.
 
Overnight margins are much higher than intra-day so if you tried to hold 10 contracts overnight on a $5000 account with $500 margins, for example, your broker will liquidate you down to your margin requirements or they will contact you and tell you to wire the funds in to cover the margin. Overnight margins are considerably higher than intra-day, depending on your broker.

Quote from greggg:

Jack,

Thanks for your response. Lets say what I quoted above is the case. What happens if this trade is held over night.
How does the over night margin rate effect it?
More...
 
Quote from greggg:Lets say what I quoted above is the case. What happens if this trade is held over night.
How does the over night margin rate effect it?
More...
Intraday margins are established by the brokerage firm you deal with. The exchanges have no intraday requirements. That's why you'll see ads saying $300 margin per ES contract. That is only for day trading. Overnight futures margins are established by the exchange at which the future is traded. All US-based brokerage firms must use the overnight exchange-set rates. I believe they can actually exceed them if they wish but I haven't read about this area in a while. Exchanges adjust the margin based on calculated risk using a method called SPAN (SPAN refers to Standard Portfolio Analysis of Risk Performance). See this link for IB's very conservative approach : http://individuals.interactivebrokers.com/en/trading/marginRequirements/margin.php?ib_entity=llc

At the moment GLOBEX (CME) has a $4,500 initial overnight requirement per ES contract. Using the eight ES contract example above:

You go long 8 ES @1300. Day margin (not at IB) = $500 x 8 = $4,000. Market has gone in your favor by 2 points. You are up 8 x $50 x 2 = $800. It is whatever time your brokerage firm imposes the overnight rates. Your account mark-to-market "cash" value is $5000 + $800 = $5,800. Margin required is $4,500. The firm will liquidate seven contracts leaving you with an overnight cash balance of $1,300 and one contract or issue a margin call for an additional $30,200 and keep all eight. Your account would probably be frozen the next day until the margin call was satisfied. I'm not sure what discretion a commodities broker has in this regard. Assuming no margin call allowed, you can see that if your position was down by 2 points all eight contracts would be sold as you would have $4,200, not the $4,500 to satisfy the overnight requirements for just one contract.

Please note - I've only been trading Index Futures for about three years and always with IB. As a result I'm not really up on the CFTC rules. IB makes up their own rules as they go! Since they are conservative, and I trade conservatively, I've never really looked into how other brokers handle the futures "Performance Bond" issue. If you've traded stocks you've probably noticed that "margin" in futures is not what you were used to in stocks. Stock margin requirements are conservative as you have to put up 50% of the value to open a position. In futures like the ES you put up (overnight) $4,500 to carry a 1300 X $50 = $65,000 position.

Perhaps someone with a different broker can explain how it works there. IB never issues margin calls, they auto-liquidate in near real-time.

Jack
 
Most brokers have 'oh shit' limits on accounts so that your position is liquidated long before you owe them money.

Econ news and unexpected announcements could be a time when things could get close, but if trading a liquid instrument such as the ES, you should be able to get out in time w/ minimal damages.

Note - if you get the point where you are close to being shut down or owe the broker money, it's time to learn about leverage and how all that stuff works.
 
IB has changed margin during the day before. Recently , they changed margin during the day, and gave notice before they changed it.

Sort of a dick move, but at least they gave notice.

Quote from JackR:

Intraday margins are established by the brokerage firm you deal with. The exchanges have no intraday requirements. That's why you'll see ads saying $300 margin per ES contract. That is only for day trading. Overnight futures margins are established by the exchange at which the future is traded. All US-based brokerage firms must use the overnight exchange-set rates. I believe they can actually exceed them if they wish but I haven't read about this area in a while. Exchanges adjust the margin based on calculated risk using a method called SPAN (SPAN refers to Standard Portfolio Analysis of Risk Performance). See this link for IB's very conservative approach : http://individuals.interactivebrokers.com/en/trading/marginRequirements/margin.php?ib_entity=llc

At the moment GLOBEX (CME) has a $4,500 initial overnight requirement per ES contract. Using the eight ES contract example above:

You go long 8 ES @1300. Day margin (not at IB) = $500 x 8 = $4,000. Market has gone in your favor by 2 points. You are up 8 x $50 x 2 = $800. It is whatever time your brokerage firm imposes the overnight rates. Your account mark-to-market "cash" value is $5000 + $800 = $5,800. Margin required is $4,500. The firm will liquidate seven contracts leaving you with an overnight cash balance of $1,300 and one contract or issue a margin call for an additional $30,200 and keep all eight. Your account would probably be frozen the next day until the margin call was satisfied. I'm not sure what discretion a commodities broker has in this regard. Assuming no margin call allowed, you can see that if your position was down by 2 points all eight contracts would be sold as you would have $4,200, not the $4,500 to satisfy the overnight requirements for just one contract.

Please note - I've only been trading Index Futures for about three years and always with IB. As a result I'm not really up on the CFTC rules. IB makes up their own rules as they go! Since they are conservative, and I trade conservatively, I've never really looked into how other brokers handle the futures "Performance Bond" issue. If you've traded stocks you've probably noticed that "margin" in futures is not what you were used to in stocks. Stock margin requirements are conservative as you have to put up 50% of the value to open a position. In futures like the ES you put up (overnight) $4,500 to carry a 1300 X $50 = $65,000 position.

Perhaps someone with a different broker can explain how it works there. IB never issues margin calls, they auto-liquidate in near real-time.

Jack
More...
 
FWIW, with a 4000 overnight margin, in order to owe the broker money the position would have to go more than 80 points against you. I have never seen this happen on a gap up or down in es. I have only seen limit down once and it did not open limit down. A broker can charge what ever day trad emargin they want. The overnight margin only applies to positions held through a globex close. One globex reopens from the maintenance period, you can trade again on day trade margins until the next closing. Even with $500 margins, once has to let it go 10 points against them before they would owe the broker money. I am sure it is possible but each broker uses it's own risk managment and they will close your positions out if they get away
 
and a wise trader would not just have enough in the account to just COVER the overnight margin. If you are even cosidering that you best rethink. Personally i always had triple the overnight margin in the account when i held overnight. No more overnights, i am 100% daytrader.

A couple examples: look back at ES charts for 1-18-2008 when the mkt closed approx 1328.00 on friday and monday was MLK holiday.....looks like we opened approx 1256.00 on the following Monday evening.

How about the Sunday evening on globex when Bear Stearns was kidnapped and the kidnappers cut a deal with the FED.

Fat finger errors scare me at night, that STOP server can go nuts and if there was a huge move etc why wake up in the morning and not be able tro keep your breakfast down?

How about some banana repuiblic General capturing Ben and Paul after Condi Rice setting them up because she was not picked to be next president? Never under estimate a women scorned. For all we know Condi and Ben were doing boomboom in the basement if he put a good word in for her.

Most huge moves probably will be to the downsdie in a global marketplace unless a fat finger error. Trust no one. Play it safe, the world is in a mess. Daytrade only and relax.
 
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