Deep Dive · Futures · Lesson 4
Margin and
Leverage
Big Idea
You do not pay the full value of a futures contract to trade it. You post a small good-faith deposit called margin — often only a few percent of the contract’s notional value. That is where leverage comes from.
- Leverage = controlling a large position with a small deposit.
- It amplifies gains and losses by the same factor.
Leverage is the reason futures can be so profitable — and so dangerous.
Margin Is a Deposit, Not a Payment
When you buy a stock you pay its full price. When you buy an option you pay a premium. Futures margin is neither — it is collateral, a good-faith deposit that shows you can cover your obligations. It is sometimes called a performance bond.
Because it is a deposit rather than a purchase, the margin is not the cost of the position and it is not the most you can lose. It is simply the security the exchange holds while your contract is open.
Initial vs. Maintenance Margin
There are two margin levels, and beginners need to know both.
| Level | What It Is |
|---|---|
| Initial margin | The deposit required to open the position |
| Maintenance margin | The minimum equity you must keep to hold it open |
If losses drag your account below the maintenance level, you get a margin call — more on that below. Margin amounts are set by the exchange and broker and change with market conditions.
Leverage in Action
Return to the crude oil contract: 1,000 barrels at $75, a notional value of $75,000. Suppose the initial margin is $6,000 (illustrative — real figures vary).
- Notional value controlled: $75,000
- Margin deposit: $6,000
- Leverage: $75,000 ÷ $6,000 ≈ 12.5×
With 12.5× leverage, a small move in oil is a large move on your deposit. A 4% rise in oil (from $75 to $78) is a $3,000 gain — a 50% return on the $6,000 margin. The same move down is a 50% loss.
| Oil at Expiry | P&L (Long 1) | Return on $6,000 Margin |
|---|---|---|
| $69 | −$6,000 | −100% |
| $72 | −$3,000 | −50% |
| $75 | $0 | 0% |
| $78 | +$3,000 | +50% |
| $81 | +$6,000 | +100% |
Notice the bottom of the table: an $6 drop wipes out the entire deposit, and a larger drop loses more than you put up.
Leverage Cuts Both Ways
Leverage does not change the odds — it changes the size. Every dollar the market moves is multiplied on your deposit, in both directions. The 12.5× that turns a 4% gain into 50% turns a 4% loss into −50% just as fast.
And crucially, unlike a bought option, your loss is not capped at your deposit. If the market moves far enough against you, you can lose more than the margin you posted and owe the difference.
The Margin Call
As your position loses money, your account equity falls. If it drops below the maintenance margin, the broker issues a margin call: deposit more cash to bring the account back up, or the position is closed out.
- Initial margin posted: $6,000
- Maintenance margin: $5,000
- Oil falls $1.50 → loss of $1,500, equity now $4,500
- $4,500 is below the $5,000 floor → margin call to restore the account
Because futures are settled every day, this can happen fast — the subject of the next lesson.
Know Your Real Exposure
The single most important habit in futures is to measure your risk by the notional value, not the margin. The $6,000 deposit is what it takes to open the trade; the $75,000 of oil is what you are actually exposed to.
| Figure | Value | What It Tells You |
|---|---|---|
| Margin | $6,000 | What it costs to open the position |
| Notional | $75,000 | How much you can actually gain or lose on |
Sizing a position by its margin is how beginners take on far more risk than they realise.
Interactive Checks
Check 1 of 3
You open a futures position and post the required margin.
What is that margin, exactly?
Check 2 of 3
You control a $75,000 contract with $6,000 of margin, and the position loses $3,000.
What is that as a return on your margin?
Check 3 of 3
Losses push your account equity below the maintenance margin.
What happens?
Common Beginner Mistakes
- ❌ Thinking margin is the most you can lose. Futures losses are not capped at your deposit — you can owe more than you posted.
- ❌ Sizing positions by margin. Your real exposure is the notional value, not the deposit it took to open the trade.
- ❌ Ignoring the maintenance level. A margin call can force you to add cash — or be liquidated — at the worst possible moment.
- ❌ Treating leverage as free money. It multiplies losses by exactly the same factor as gains.
Quick Memory Tool
- Margin = a good-faith deposit, not the price
- Initial margin opens a position; maintenance margin keeps it open
- Leverage = notional ÷ margin
- Leverage amplifies gains and losses equally
- Your real risk is the notional, not the margin
Next Lesson
Mark to Market and Daily Settlement — futures gains and losses are settled to your account every single day. See how that daily cash flow works and why it can trigger a margin call so quickly.