Deep Dive · Futures · Lesson 5
Mark to Market
and Daily Settlement
Big Idea
Futures are not settled only at expiration — they are settled at the end of every trading day. Each day the exchange sets an official settlement price, your position is revalued, and the day’s gain or loss moves as real cash into or out of your account.
- Your position is revalued daily at the settlement price.
- That day’s profit or loss is settled in cash, not left on paper.
This daily settling-up is what “marking to market” means.
Settled Every Day, Not Just at Expiry
At the close of each session the exchange publishes an official daily settlement price for the contract. Your position is marked to that price: if it moved in your favour the gain is credited to your account; if it moved against you the loss is debited. That daily cash flow is called variation margin.
This is very different from holding a stock. A stock’s unrealised profit or loss just sits there as a paper number until you sell. Futures realise the gain or loss every single day — the money actually moves.
A Day-by-Day Example
You go long one crude oil contract — 1,000 barrels — bought at $75.00, so every $1 move is worth $1,000. Your initial margin is $6,000 and the maintenance margin is $5,000. Watch how the account equity changes as the market is settled each day.
| Day | Settlement Price | Daily Change | Cash to/from Account | Account Equity |
|---|---|---|---|---|
| Day 0 (entry) | $75.00 | — | — | $6,000 |
| Day 1 | $76.00 | +$1.00 | +$1,000 | $7,000 |
| Day 2 | $74.00 | −$2.00 | −$2,000 | $5,000 |
| Day 3 | $73.00 | −$1.00 | −$1,000 | $4,000 — below maintenance → margin call |
| Day 4 | $75.50 | +$2.50 | +$2,500 | $6,500 |
On Day 3 the equity of $4,000 falls below the $5,000 maintenance margin, so a margin call is triggered — you would have to top the account back up to keep the position open, even though the market recovers on Day 4.
Variation Margin
The cash that moves each day is called variation margin. Each evening the winners are effectively paid from the losers’ accounts — money is debited from the traders on the wrong side of the move and credited to the traders on the right side. The clearinghouse sits in the middle and orchestrates every transfer.
The key point: variation margin is actual cash, not a paper number. A losing day genuinely removes money from your account, and a winning day genuinely adds it.
Why Daily Settlement Exists
Settling every day serves one central purpose: no trader can quietly accumulate a huge unpaid loss. Because losses are collected the same day they happen, a position can never drift far underwater without the account being topped up or closed.
That keeps the clearinghouse safe and is a big reason futures carry very low counterparty risk — the risk that the other side defaults. The debt simply is not allowed to build up in the first place.
How It Connects to Margin Calls
Because losses hit your account the same day, a single bad session can push your equity below the maintenance margin quickly — exactly what happened on Day 3 above. The moment it does, you get a margin call: add cash to restore the account, or the position is closed out.
This is the mechanism behind the margin call from Lesson 4. Daily settlement is what makes it happen so fast: you do not wait until expiry to find out you are short of cash.
Interactive Checks
Check 1 of 3
You hold a futures position that is marked to market at the close.
What does “marking to market” the position mean?
Check 2 of 3
You are long one crude contract (1,000 barrels), and it settles down $2.00 today.
What happens to your account today?
Check 3 of 3
The exchange settles every futures position at the end of each trading day.
Why settle daily instead of only at expiration?
Common Beginner Mistakes
- ❌ Thinking P&L only matters at expiry. Futures settle every day — the gain or loss is realised long before the contract ends.
- ❌ Forgetting settlement needs real cash. Variation margin is money that actually leaves your account, so you need cash on hand to cover losing days.
- ❌ Not watching equity daily. If you only check occasionally, a margin call arrives as a nasty surprise.
- ❌ Assuming a paper loss can be ignored. In futures there is no paper loss to wait out — it is settled in cash the same day.
Quick Memory Tool
- Futures are settled every day, not just at expiry
- The daily cash movement is variation margin
- Winners are paid from losers each day, via the clearinghouse
- Daily settlement keeps default risk low
- A bad day can trigger a margin call the same day
Next Lesson
Hedging with Futures — the original purpose of futures: removing price risk. A producer or consumer takes an offsetting futures position so a loss on one side is covered by a gain on the other.