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Hey, all. Just a question about what happens when margin prices change.
If I enter a contract of a commodity at a certain margin price, but then it changes, when I exit it, would I get the original margin price back, or will I get the changed price?
Can a margin price change before I exit it?
I appreciate your replies.
Can you help answer these questions from other members on NexusFi?
I think you need to think of margin differently. Its not a price, you dont "pay" margin. Margin is a leverage or security for the trading company.
Think of it like a secured credit card. You put money into an account, and that money stays there and isnt touched unless you dont pay your credit card.
In the case of futures, an actual transaction doesnt happen until the trade is ended, either by a counter trade or taking delivery. Speculators like us dont take delivery, so no money leaves your account unless your trade is a loss. While the transaction is open, your margin is reserved, but stays put until the closing trade. If its a win, they put the increase in, minus fees.
Make sense?
The broker can require a larger margin reservation on a trade, for example when a day trade turns into overnight. All margin reserve is freed up, minus losses, regardness of how much was reserved when the trade turns.
Margin is a performance bond on a contract. You are not buying or selling anything. The only thing that changes is the amount of money that must be held for the performance bond, not a "price"
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Expanding on what @traderwerks said margin changes can and do happen at any time. If you have a position open and margins are increased you will be expected to post the increased amount, if they decrease you will have money refunded to you.
thanks traderwerks - now "Good Faith Money" I understand but I appreciate you quoting the official term from the CME - you learn something new every day!
To add just a little to these excellent answers, the reason you need a performance bond is that at the end of the day, all accounts will be "marked to market" -- if they have an open trade that has a loss, they are actually charged for the loss, if they have a profit, they are credited with the profit. If they close the trade during the day, they will be charged/credited when they close it. Your margin is the money you have put up to cover that charge, if it comes.
The margin required by the exchange is set at a level that recent experience shows should be enough, per contract, to cover likely losses, given recent volatility.
Brokers can set lower margins for day-trades, opened and closed the same day.
Since it is possible to lose more than the margin you have in your account, the broker will either close you out or require more margin as your loss approaches your total margin; if for some reason neither is done in time, you can lose more than 100% of your margin deposit, and you are liable for it. (One of the charms of futures trading.... )
but I appreciate you quoting the official term from the CME - you learn something new every day!
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