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 to 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.

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 options 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 using 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 in more money. That is the margin call.

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 to preserve 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 ($\footnotesize n$) you are going to buy, we obtain two additional notions:

• Total initial margin requirement (TIMR):
  $\footnotesize \rm{TIMR = IMR × n}$
• Total maintenance margin requirement (TMMR):
  $\footnotesize \rm{TMMR = MMR × n}$

Our margin call calculator can work as a maintenance margin calculator if you expand the $\footnotesize \rm{Total\ margin\ amounts}$ section of our tool.

So, considering $\footnotesize \rm{open \ loss (OL)}$ as the unrealized loss from contract price fluctuations per contract, then we have three situations:

• If $\footnotesize \rm{ID - OL \times n > TMMR}$, you do not get a margin call.

• If $\footnotesize \rm{ID - OL \times n = TMMR}$, you also do not get a margin call.

• If $\footnotesize \rm{ID - OL \times n < TMMR}$, 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 $\footnotesize \rm {current \ deposit \ amount \ (CD)}$ as the difference between the initial deposit minus the open loss ($\footnotesize \rm {CD = ID - OL × n}$), we get:

$\footnotesize \rm {Extra \ required \ cash = TIMR - CD}$

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:

OL = 11,025 USD

For opening such a position, let's say on December 15th, 2021, the broker would have required per contract:

IMR = 12,650 USD
MMR = 11,500 USD

Considering 2 contracts, n = 2,

TIMR = 25,300 USD
TMMR = 23,000 USD

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.

ID = 26,000 USD

By December 20th, we would have had:

CD = 26,000 USD - 11,025 USD × 2 = 3950 USD, which is below the TMMR, triggering the margin call.

Our margin call calculator also shows how much extra money the broker would have required to reach the initial margin amount:

Extra required cash = 25,300 USD - 3950 USD = 21,350 USD

Otherwise, the broker would have closed your position, giving you back only 3950 USD.

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 ($\footnotesize \rm {\Delta \ Contract \ value}$).

1. First, we define whether we are short or long and input a loss. The calculator will tell you how much your current balance is.

2. You iterate the loss until you get the breakeven margin call value. For our example above, the value is:

   Margin call threshold = ID - TMMD

   Margin call threshold = 26,000 USD - 23,000 USD = 3000 USD

However, such value considers the two contracts we bought. Hence, each contract will require a 1500 USD change to reach the maintenance margin value.

Considering that the ES mini SP500 has a value of 50 USD per point, the maximum contract value change is 30.

ΔContract value = ΔPoints × Value per point

ΔPoints = ΔContract value / Value per point

ΔPoints = 1500 USD / 50 USD per point = 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 Yahoo Finance.

Here, we are going to cover three possible methods for avoiding margin calls:

1. 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.

2. 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.

3. Consider covering your positions with options strategies such as the ones we cover at the options spread calculator so that 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.