Punisher is onto it. What you are missing, TraderJoes, is that notional value with plain ol' futures means absolutely nothing if you do not go into expiry. It is simply...not...needed to know. You know? If I hold 1 contract of CL through the market close, the CME wants about 3500 bux in my account to cover it. No problem. Where in God's Holy High Heaven in there does it matter that it is 42,000 gallons of oil? Where? Show me! Now, if I wish to hold this physically-deliverable contract PAST expiration? Sure, now we have an issue. But we little specerlators do not do that. The notional value of these things only come into play when we hold into expiration...On the futures side. If you have options involved, I have no idea. Maybe that is the fear?
I understan I understand. If I'm correct, from the risk and reward perspective, the notional value matters. Holding one contract of CL at $57000 notional, with 2% up or down, it means $1140+- in your account. As traders, as far as I see it, we just need to worry about margin requirement and notional value. If I have $57000 is equity and long 10 contracts of /CL, then I'm levered up 10 times of my account size. 2% movement will mean $11400+- to my P&L. I don't see how Futures are inherently risky. It is highly levered but you don't need to lever it. If your account size is $57000 and you long 1 contract of /CL, there is zero leverage and no more riskier than $57000 of other cash oil product. I don't know if I'm missing anything because the concept of notional value is straight forward to me. If your account size is smaller than the notional value of your futures holding, then you're levered. If your account size is bigger than the notional value of your futures holding, then you are not levered. If my account is $10MM, I can have 100 contracts of CL at $5,700,000 and still not levered. My margin requirement will be lower than holding a non-future product but that's it. I don't understand why Futures products are "inherently" levered. Normal margin account allows stock to be levered 4x but that doesn't mean stock is "inherently levered". I see Futures products as having lower margin requirement which gives you more leverage compare to stock.
It just dawned on me that in one particular scenario notional would matter: If the broker (or exchange, or both) suddenly changed the margin requirement to = a LOT more than what they did when you got into the position. Like if you had 1 CME CL contract at $50 per bbl and instead of $3,000 margin they upped it to 90% of underlying during the day. Now you'd need $45K in the blink of an eye, and the little guy with $10K in the account is screwed. Thankfully the CME's margin adjustments are usually less than 1%, and they give 24 hours notice on the change (or so they say they do. I've seen the updates come through 6-8 hours before the change takes effect on average).
Thanks. Do you know if there is a place I can look up historical fluctuation of margin requirement of futures during volatile period? I want to see what's the worst case scenario if I see a spike in the margin requirement of my holdings.
Maybe I've misunderstood this from day one, but isn't leverage calculated by simply dividing the value of the contract by the margin? ES, $2600x50=$130000/$4000=32.5 =leverage of 32.5:1.
I guess maybe there is a difference between leveraging on the account basis vs per contract basis. Per contract basis, you're right that the leverage is the notional value divided by the margin requirement. However, on the account basis, I think the leverage is notional value divided by your account value.