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2007issue C101

Construct futures size from the good-faith deposit and the spread

Futures margin is a good-faith deposit the firm can apply against losses, and a breach of the maintenance floor is restored all the way to initial margin. With that bound locked, the ticket then chooses an outright or a calendar or related-commodity pair whose intended result is the relative price.

  • Futures margin is a good-faith deposit the brokerage can apply against trading losses, not a cash down payment plus borrowed funds as in a stock purchase.
  • Remaining available funds, not the original deposit alone, decide whether the account stays above the maintenance floor, and a breach must be restored all the way to initial margin.
  • A request for more funds can follow open losses or a raised requirement, and an unmet call can lead to liquidation at the available market price.
  • A spread is long one contract and short another so the result comes from the price relationship: an intramarket time spread pairs delivery months of one contract, and an intermarket spread pairs the same or a closely related commodity.
Entries in this reading3 entries
Current trackCalendar spread trading19 readingsCommodity spread trading26 readingsMargin management68 readings

What the good-faith deposit is

Futures margin is a good-faith deposit the brokerage can apply against trading losses. It is not a cash down payment plus borrowed funds as in a stock purchase.

Exchange minimum deposits are described as about 5 percent of a contract’s current value, and a brokerage may require a larger deposit than that minimum.

That posted equity is the initial margin: the amount that must be in place to enter a futures position and the amount that must be fully restored after a call.

How remaining funds trigger a restore to initial

Open profits increase the futures margin balance and open losses reduce it. Remaining available funds, not the original deposit alone, determine whether the account stays above the maintenance floor.

If remaining funds fall below maintenance margin, the account must be restored all the way to the initial margin level. In the worked figures, a 2000 initial and 1500 maintenance contract that falls to 1200 remaining funds requires an 800 deposit to return to 2000.

A margin call can also be triggered when the exchange or the firm raises margin requirements, not only when trading losses reduce the account.

How a spread holds the price relationship

A futures spread is constructed by buying one contract and selling another so the intended result comes from a change in the price relationship rather than from an outright rise or fall. That price difference is the spread relationship the construction is built to capture.

An intramarket time spread is long one delivery month and short another month of the same futures contract on the same exchange. It targets differences among delivery months of one commodity.

An intermarket spread is long one market and short another in the same or a closely related commodity, including currency pairings such as the euro and the yen and agricultural pairings such as corn and soybeans.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
12 of 18 in the Calendar spread trading track
20071-1 pp.Next on Calendar spread tradingCritiquing calendar spreads when reversals overrunA same-strike calendar buys a longer-dated option and sells a shorter-dated option so nearer expiration can lose value faster than the long option.
All readings on this track · 18 readings
  1. 1982Constructing commodity spreads, calendar legs, and option straps
  2. 1987Seasonal calendar spreads as financed capital slots
  3. 1989Seasonal dates, confirmation, and reconstructed spread bars
  4. 1991Calendar-spread divergence as a demand clock for commodity reversals
  5. 1992Expiration-forced convergence for basis, calendar, and option-income trades
  6. 1993Write the soybean intercrop calendar as one procedure
  7. 1996A commodity-basket redesign read as a proxy and a calendar-spread
  8. 2003Calendar spread construction by volatility skew
  9. 2003Livestock calendar spreads during a commodity-index roll
  10. 2004Same-strike calendar construction, decay income, and account gates
  11. 2004Range-bound calendar spreads and precommitted exits
  12. 2007Construct futures size from the good-faith deposit and the spread
  13. 2007Critiquing calendar spreads when reversals overrun
  14. 2010Name the spread, then construct the legs
  15. 2012Monthly calendar income under a volatility-regime process
  16. 2016A VIX calendar-spread case after the 2015 volatility spike
  17. 2017Yield curve kinks as spread laboratories
  18. 2018Bitcoin futures contract choice, percentage margin and calendar spreads
By fieldSizing and leverage109 readingsBy year2007144 readings
All 19 readings tagged Calendar spread trading
Also on Calendar spread trading5 readings
1982Constructing commodity spreads, calendar legs, and option straps1989Seasonal dates, confirmation, and reconstructed spread bars1991Calendar-spread divergence as a demand clock for commodity reversals1993Write the soybean intercrop calendar as one procedure1996A commodity-basket redesign read as a proxy and a calendar-spread