Having a litte trouble understanding maintenance margin?

Discussion in 'Index Futures' started by snoopytrader, Sep 4, 2010.

  1. Hi Guys,

    I am new here, please go easy on me

    It's my understanding that you fund your new brokerage account with some minimum account balance. Let's say $2,000. Then when you want to trade say the emini s&p 500. You then purchase 1 contract at $500 Then the maintenance margin is 75% of that so $375. Now this means if I am trading for say a 14 tick profit which equates to $175 (14 x $12.50 per tick) and a 10 tick loss. The 10 tick loss would equate to $125 (10 x $12.50 per tick). Now as the maintenance margin is $375 that means if my trade drops by 10 ticks my contract would be worth $375 so as long as the market price moves back up above $375 I am safe. But if the price went back down and now went even 1 tick below $375 which would now be $362.50. A margin call will take place and I now have the option to either sell the contract and take that loss of $137.50 ($500 initial contract price minus $362.50). Or I can top up back to the maintenance margin level using the funds left in my account which is $1,500 ($2000 deposit minus $500 emini contract that I am trading with). is that correct?

    Second question based on the above scenario. What if the market suddenly totally wiped out all my account, then I got a margin call and needed to either sell my contract or deposit more funds into my account. But I hear a wire transfer will take 2 to 3 days and by then your account can further drop in price and you can go in debt with your broker. Then he could sue you or whatever. But also if during those 2 to 3 days it takes for the wire transfer your account furthers goes in debt then your broker will liquidate your position and has power of authority to do this. Is that correct?

    Lastly, if things went well as in the first paragraph and I deposited more funds, would I have to bring my account back up to the initial contract size of $500 or just top it back up to the maintenance margin of $375, is this correct?

    I hope you could please answer those 3 questions as they are really bugging me.

    Many thanks in advance