Margin Call Calculator
The excellent margin call calculator can help you plan your future contracts trades in advance, helping you avoid the super-scary broker call when funds go the requirements.
In this article, we will cover what a margin call is, the formulas we use, and show a real example of how to calculate margin call limit requirements. First, let's discuss the definition of the margin call.
What is a margin call?
Future contracts can cost a lot of money. For example, the E-mini S&P 500 futures contract has a point value of 50 USD, which means the entire contract has approximately 4700 points and is worth 235,000 USD. Quite something, eh? You could verify other futures contracts value in the futures contracts calculator.
But you don't need such an amount. With leverage, futures contract brokers allow you to invest in futures and other derivatives like option contracts. In case, you do it, be sure to check your likely profits in the call option calculator. To invest with margin means to operate with leverage, in other words, with debt.
But, there are specific requirements, specifically about the amount of cash you have to keep in brokers' accounts for them to continue lending you their money. Brokers call it: maintenance margin.
Remember how we calculated profit or loss in the futures contract calculator? Such gains or losses are added or subtracted from your initial investment. If your deposit account has a loss so significant that it goes below a predefined value (the maintenance margin value), the broker calls you, requiring you to put more money. That is the margin call.
How do margin calls work? Margin call definition
For this section, we assume you understand the mechanics of futures contracts. Hence, we are going only to explain the new concepts:
Initial deposit (ID): Quite self-explanatory. Refers to the amount of money that the investor deposits in the broker account for trading futures contracts.
Initial margin requirement (IMR): Future contracts require the initial deposit to be above the initial margin requirement for opening the position. Usually between 3-12 % of the whole contract value.
Maintenance margin requirement (MMR): Once the futures contract position is open, you need to keep your account balance above the maintenance margin for preserving your position. The moment your balance goes below the MMR, you get the margin call, and if you do not add more money (minimum, up to the IMR), the broker liquidates your investments and gives you back the remaining money, if any.
After considering the amount of contract () you are going to buy, we obtain two additional notions:
- Total initial margin requirement (TIMR):
- Total maintenance margin requirement (TMMR):
Our margin call calculator can work as a maintenance margin calculator if you turn on the of the calculator.
So, considering as the unrealized loss from contract price fluctuations per contract, then we have three situations:
If , you do not get a margin call.
If , you also do not get a margin call.
If , you get a margin call.
If the second condition applies, and you get a margin call, you need to pour money into your account up to the initial margin. If we define the as the difference between the initial deposit minus the open loss (), we get:
How to calculate a margin call? Real life example
Once we know what a margin call is, let's cover an example where we use all that we explained above. Between December 16th, 2021, and December 20th, 2021, we saw the ES mini SP500 contract fall from 4747.75 points to 4527.25. If we use our margin call calculator, we will have:
Buying contract price = 4747.75 points
Selling contract price = 4527.25 points
It means that the contract value decreased 220.5 points, which for the ES mini SP500 implies a loss of 11,025 USD per contract:
For opening such a position, let's say on December 15th, 2021, the broker would have required per contract:
Considering 2 contracts, ,
Then our initial deposit would have had to be at least 25,300 USD. Let's say we deposited: 26,000 USD on December 15th, 2021.
By December 20th, we would have had:
, which is below the TMMR, triggering the margin call.
Our margin call calculator also shows how much extra money the broker would have required for reaching the initial margin amount:
Otherwise, the broker would have closed your position, giving you back only 3950 USD.
How to calculate the maximum contract value change for getting a margin call?
Once we have our initial deposit defined, the futures contract specifications, and the number of contracts we are going to trade, we use our margin call calculator in a different way for calculating the maximum contract value change ().
First, we define whether we are short or long and input a loss. The calculator will tell you how much is your current balance.
You iterate the loss until you get the breakeven margin call value. For our example above, the value is:
However, such value considers the two contracts we bought. Hence, each contract will require a 1500 USD change to reach maintenance margin value.
Considering the ES mini SP500 has a value of 50 USD per point, then the maximum contract value change is 30.
The very first margin call the investor received was when the ES mini SP500 contract value dropped to 4717.75 points, which happened in hours according to.
How to avoid a margin call?
Here we are going to cover three possible methods for avoiding margin calls:
Calculate how much your current deposit amount could fall without triggering the margin call. Define the probability for the contract to reach the value that would cause such loss and set an automatic order to sell your positions before reaching the margin call value. You could use technical analysis tools like the moving average calculator.
Taking into consideration the maximum bearable drawdown indicated above, define how many futures contracts you would be willing to sell to reduce the maintenance margin level.
Consider covering your positions with options strategies such the ones we cover at the Options spread calculator so in case the market goes against your futures contract position, you still could make money from options. With such profit, you could reduce total losses or cover the margin call.
What to do if I get a margin call?
Investors have three options in case they get a margin call:
- Put more money into the account, up to the initial margin requirement.
- Sell one or more futures contracts. In that case, the maintenance margin requirement will become lower, and the broker will not require extra money.
- Exit the trade. You will keep your current deposit value which will result after subtracting the loss due to contract ticks/points change
When do margin calls happen?
Margin calls occur when the amount of money in your account minus the unrealized losses of your open contracts goes below the maintenance margin requirement. Your broker calls you asking to put more money in the account in such situations.
What are the risks of margin operations?
Adding debt to your buying power has more risk but also more potential to generate profit. Check the following possibilities considering 100 USD of equity, 100 USD of debt, and a 50% investment price change.
- 50% up would put you at 300 USD. You pay your 100 USD of debt and keep 200 USD. 100% return for you.
- 50% down would put you at 100 USD. You pay your 100 USD of debt and keep 0 USD. 100% loss for you.
What is the difference between futures margin and stock margin?
- Future's margin requires a maintenance margin from 3% to 12% of the total contract value. For example, the ES mini SP500 has a total contract value of 238,500 USD as of January 12th; meanwhile, its maintenance margin is 11,500 USD.
- Stock margin requires a maintenance margin of at least 25%; whereas some brokers ask 40 to 50% of the stock value price
How do I calculate the loss I can bear before I get a margin call?
To calculate the maximum loss possible before getting a margin call:
- Determine the amount of initial margin requirement (IMR) and maintenance margin requirement (MMR) based on the futures contract specification and the number of contracts you will acquire. Be sure your initial deposit (ID) is larger than your IMR.
- Subtract MMR from ID. Now, you have how much you can lose.
- Divide the loss you can bear by contract points value, and you will get how many contract points you could withstand.