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Margin, Leverage, and Settlement in Futures

Margin is not a payment

A common misunderstanding worth clearing up first. Futures margin is not a down payment on the asset. It is a performance bond: collateral guaranteeing you can meet daily losses.

You do not own anything until delivery, and you have not paid for anything. You have posted security against an obligation.

Initial margin is required to open a position, typically 3% to 12% of notional depending on volatility. Maintenance margin is the minimum balance thereafter. Fall below it and a margin call requires topping back up to the initial level, usually same-day.

The leverage this creates

Leverage=notional valuemargin posted\text{Leverage} = \frac{\text{notional value}}{\text{margin posted}}

A crude oil contract of 1,000 barrels at $80 is $80,000 notional. At $6,000 initial margin, that is roughly 13:1 leverage.

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