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L.2 · ADVANCED · 2 MIN

Futures Mechanics: Margin, Mark-to-Market, and Basis

Unlike stocks where you pay in full, futures require only a margin deposit — typically 5–15% of the contract value. This leverage amplifies both gains and losses, and daily mark-to-market settlement means you can lose more than your initial deposit. Path note: margin and mark-to-market mechanics are core plumbing — a refresher if you've traded futures; the 301-level material begins in earnest with the dealer-flow modules.

Quiz · 5 questions ↓

Margin, mark-to-market, and basis defined

ConceptDefinitionExample
Initial MarginDeposit required to open a position$10,000 to control $100,000 of oil
Maintenance MarginMinimum account balance to keep positionIf equity drops below this, margin call
Mark-to-MarketDaily P&L settlement in cashGain $500 today → $500 credited to account
BasisSpot price − Futures priceConverges to zero at expiration

Leverage as contract value over margin

Leverage = Contract Value / Margin Deposit

How leverage magnifies a small move

At 10x leverage, a 5% adverse move wipes out 50% of your margin. A 10% move wipes you out entirely. This is why futures margin calls happen quickly and why risk management is non-negotiable.

Calculate an E-mini's margin-call threshold

Calculate the leverage for an S&P 500 E-mini future: ~$200,000 notional with ~$12,000 margin. What percentage move would trigger a margin call?

Notional versus margin: where P&L lands

You buy one crude oil future ($70,000 notional) with $7,000 margin. Oil drops 8%. What happens?

Basis risk and the imperfect hedge

Basis (spot − futures price) converges to zero at expiration. Understanding basis is critical for hedgers because an imperfect hedge occurs when the basis changes unexpectedly. This is called basis risk.

Marking an overnight move to market

You're long 10 E-mini S&P futures at $4,500 index. Initial margin: $15K/contract. Overnight the S&P moves +0.5%. What's your marked-to-market P&L?
Check your understanding

Sit with the ideas.

You hold a long crude oil futures position worth $100,000 notional with $10,000 in initial margin. Oil drops 8% in one day. What happens?

Why:
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Other lessons in this course.

  1. 01Forwards and Futures: Locking In a Price
  2. 02Futures Mechanics: Margin, Mark-to-Market, and Basis— reading now
  3. 03Put-Call Parity: The Pricing Anchor
  4. 04The Greeks in Practice: Gamma, Vega, and Rho
  5. 05Interest Rate Swaps: The World's Largest Derivatives Market
  6. 06Credit Default Swaps: Insurance on Bonds
  7. 07Delta Hedging: How Market Makers Stay Neutral
  8. 08Volatility as an Asset Class
  9. 09Greeks Beyond Delta: Why a Delta-Hedged Position Bleeds
  10. 10The Volatility Surface: Smile, Skew, and Term Structure
  11. 11VIX Curve and Variance Swaps: Why Long-Vol Products Bleed
  12. 12Exotic Options: Barriers, Lookbacks, Asians, and Digitals
  13. 13Interest-Rate Options: Caps, Floors, and Swaptions
  14. 14Volatility Trades: Long Gamma, Long Vega, and the Vol Curve
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