Investors and traders that use the futures markets must be fully educated on the use of margin. The beauty of futures markets is the leverage they afford. Leverage allows a market participant to put up very little money to control a large position in an asset. Futures markets offer contracts in equity indices, debt, foreign exchange instruments and commodities.

Margin serves as a performance bond when it comes to futures contracts.


The exchange-clearing house collects and monitors margin. The exchanges, such as the Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE), determine margin requirements for all contracts offered for trading. The level of margin is a function of volatility. Volatility is the variance or trading range for any particular futures contract. If a trading range for an asset becomes wider, margins tend to rise. If a trading range narrowed, the exchange will often lower margin requirements.

Margin varies from product to product and the exchange can change requirements as often as they deem appropriate given market action. Below is a list of original margin requirements by commodity which highlights margin as a percentage of total contract value as of May 26, 2015. Exchanges set the levels based on the volatility of the underlying commodity. That is why commodities like coffee, natural gas and crude oil have the highest levels of margin as a percentage of total contract value. The less volatile a commodity, the lower the margin requirement.

As margin levels change often, please check directly with the exchanges for the latest margin levels:

COMEX Gold futures, original margin is $4,400 per contract which represents 3.7% of total contract value.

COMEX Silver futures, original margin is $7,150 per contract which represents 8.5% of total contract value.

COMEX Copper futures, original margin is $3,190 per contract which represents 4.6% of total contract value.

NYMEX Crude Oil futures, original margin is $5,390 per contract which represents 9.3% of total contract value.

NYMEX Natural Gas futures, original margin is $2,750 per contract which represents 9.7% of total contract value.

CBOT Soybean futures, original margin is $2,200 per contract which represents 4.8% of total contract value.

CBOT Corn futures, original margin is $1,100 per contract which represents 6.2% of total contract value.

CBOT Wheat futures, original margin is $1,430 per contract which represents 5.8% of total contract value.

ICE Sugar futures, original margin is $1,045 per contract which represents 7.7% of total contract value.

ICE Coffee futures, original margin is $6,050 per contract which represents 13.0% of total contract value.

ICE Cocoa futures, original margin is $1,100 per contract which represents 3.5% of total contract value. 

CME Live Cattle futures, original margin is $1,320 per contract which represents 2.2% of total contract value.

CME Lean Hog  futures, original margin is $1,320 per contract which represents 4.0% of total contract value.

 

Margin is the amount of money that one must commit in order to take a long or short position in a futures market. Therefore, the return of a position is a function of profit or loss as related to the margin posted by the trader or investor.

How to calculate return on margin

It is always important for traders and investors to keep track of the results of their efforts. The only way to improve your trading and investing techniques is to keep track of your results and analyze what goes right and what goes wrong. Trading and investing is a process, the more you understand the better you will become. There are a number of issues to take into consideration when calculating the return of a position based on the margin employed. First is the amount of margin posted. Second is the amount of commissions paid in order to transact or buy and sell the position, as this is a direct cost of the risk position. Finally, the total gross profit or loss on the position is of primary importance. Let us consider two examples:

Buy 5 gold contracts at $1188 per ounce

Sell 5 gold contracts at $1210 per ounce

Commissions: Round-turn at $10 per contract
Margin Requirement: $4,400 per contract

Total Gross Profit = $11,000 (1210-1188=$22 x 5 contracts x 100 ounces per contract)

Total Net Profit = $10,950 (Gross profit - commissions of $10 x 5)

Return on Margin = +49.77% ($10,950/$4,400 x 5)

In this example, the trader or investor bought and sold five contracts of gold (each contract represents 100 ounces of gold) for a profit. Adjust the gross profit by the total commission for the transaction ($10 x 5) by subtracting $50 from the gross profit. The net profit is then divided by the total margin requirement for the 5 contract position ($4,400 x 5 = $22,000). The return on margin in this example is +49.77%.

Buy 2 natural gas contracts at $3 per mmbtu

Sell 2 natural gas contracts at $2.95 per mmbtu

Commissions: Round-turn at $10 per contract
Margin Requirement: $2,750 per contract

Total Gross Loss = $1,000 (3.00-2.95=$0.05 x 2 contracts x 10,000 mmbtu's per contract)

Total Net Loss= $1,020 (Gross loss + commissions of $10 x 2)

Return on Margin = -18.55% ($1,020/$2,750 x 2)

In this example, the trader or investor bought and sold two contracts of natural gas (each contract represents 10,000 mmbtu's of natural gas) for a loss. Adjust the gross loss by the total commission paid for the transaction ($10 x 2) by adding $20 to the gross loss. The net loss is then divided by the total margin requirement for the 2 contract position ($2,750 x 2 = $5,500). The return on margin in this example is -18.55%.

As you can see, there is a tremendous amount of leverage in the futures market. Leverage magnifies profits and losses alike. When trading or investing in futures make sure you understand and keep track of the return on margin on all of your positions. This will allow you to measure your results and improve your investing method.