Avoiding Margin Calls

Filed in commodities, Debt, EPS, Gold, Gold Investing, o, ubs by on January 8, 2011 0 Comments

Image via Wikipedia MB Wealth Corp. is not responsible and does not endorse anything outside of the content of this article authored by Matthew Bradbard; President of MB Wealth. In the current Wild West trading environment, where 5% price swings have become commonplace, avoiding margin calls is a bigger challenge now than what I’ve ever seen in my career. Traders can take all the necessary steps and still there is still no assurance that a margin call can be avoided, here are some suggestions that may aid in deterring future margin calls when trading commodities. Let me start by explaining exactly what a margin call is; a call from a clearinghouse to a clearing member, or from a broker or firm to a customer, to bring margin deposits up to a required minimum level. When the balance of the account drops below the maintenance margin level a margin call is issued. Once a margin call is issued the party receiving the call generally has 48-72 hours to bring their account balance back above the initial maintenance amount. If you wish not to satisfy the margin call the alternative is liquidating the position and taking the loss. Moving onto margin; the amount of money deposited by both buyers and sellers of futures contracts and by sellers of options contracts to ensure performance of the terms of the contract. The margin in commodities is not a down payment, as in securities, but rather a performance bond . For every commodity there is an initial margin and a maintenance margin determined by the exchange that the underlying commodity trades on. For example, when trading 30-yr bond futures, margins are set by the CME Group , while when trading cotton futures margins are set by ICE . The leverage involved when trading commodities can at times be massive; by definition leverage is the ability to control large dollar amounts of a commodity with a comparatively small amount of capital. Leverage is a double-edged sword working as your best friend when properly positioned and your worst enemy when positioned incorrectly. Because the leverage at times can appear excessive, a possible solution would be to not over leverage one’s trading account. For example if the initial margin amount for one Crude oil futures contract is $5,000 then in your mind you should allocate $10,000 to mitigate extreme swings in you trading account. When trading commodities be selective and don’t think that all the money in your trading account needs to be allocated at all times. I try to trade a very aggressive asset class conservatively…which is easier said then done. Related articles “CME Group Announces Money and Margin Requirement Increases” and related posts (jsmineset.com) Are These Investments Worth the Risk? (fool.com) ICE Announces December Holiday Trading Schedules (prnewswire.com) Other possible solutions include, but are not limited to: trading mini- futures contracts , decreasing one’s trading size, purchasing options, or a trading …

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Avoiding Margin Calls

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