What is the difference between initial margin and maintenance margin in futures trading?

• A. Initial margin is the upfront collateral required to open a position; maintenance margin is the minimum equity level to maintain the position.
• B. Initial margin is the daily settlement amount; maintenance margin is the upfront collateral.
• C. Initial margin and maintenance margin are identical concepts.
• D. Initial margin applies to futures while maintenance margin applies to options.

Answer: (A)

In futures, margin is the collateral you put up to cover potential losses. The main idea is to have a security buffer so both you and the exchange are protected as prices move.

The initial margin is the upfront amount you must deposit to open a position. It acts as a performance bond: it ensures you have funds available to cover losses if prices move against you right after you enter the contract.

The maintenance margin is a lower threshold kept in your account to keep the position open. It’s the minimum equity you must maintain. If, after daily price changes are posted (the mark-to-market process), your account balance falls below this level, you’ll receive a margin call and must add funds (or reduce the position) to bring the balance back up, typically back to the initial level.

Profits and losses are settled daily, which updates your margin balance. Gains increase your available margin; losses reduce it. The daily settlement is separate from the initial and maintenance margins, but it’s what causes the balance to move toward or below the maintenance level.

All of this applies to futures; margins for options work differently, so the distinction here is specific to futures contracts.