Margin and leverage

The futures exchange does not require the investor to have on his account the total value of the futures contract. A margin, sometimes called a good faith deposit, is, however, required.

The size of the required margin is determined by the futures market and differs from future to future. The minimum margin is usually between 5% and 20% of the nominal value of the future.

There is an intraday margin and an overnight margin. The intraday margin is the margin required to open a position which is closed out again the same day. The overnight margin (usually double the intraday margin) is the margin you must maintain on your account to keep a position one night or more.

For example: the FTSE 100 future

The value of the future is defined as: FTSE index x £ 10

If the index is at, say, 5.200 points the nominal value of the futures contract is 5.200 x £ 10 = £ 52.000.

The intraday margin is currently £ 2.252.
The overnight margin is currently £ 4.505.

So you need at least £ 2.252 on your account before you can buy or sell a FTSE 100 future.

Suppose you have exactly £ 2.252 on your account and you buy a future. In that case your leverage is currently 23-to-1 (= £ 52.000 / £ 2.252).

This amount of leverage is not advisable for the retail investor. Use limited leverage only.

Opening a position with such leverage is not workable anyway. Lose £ 1 and your equity drops below £ 2.252 and the broker is obliged to close out your position.

Profits (losses) on open futures positions are credited to (debited from) your account on a daily basis.