Margin Call

Well, got my first margin call. How scary indeed. Here's what happened:

As per the previous post, you'll note that the account value went up sharply and then back down. After that (around the end of March), the stock market started to go up. This is good for most, but bad for my futures account since I'm shorting the S&P. To give you an idea, each point is worth $250, so when the S&P moved from 1275 to 1375, in the last 2 weeks of March, that's a $25,000 drop. Ouch.

Couple this with a drop in oil. Not an uber big drop, but a decent sized one. It's because I still have 5 contracts in oil, representing 1,000 barrels each. Thus, the $5ish dollar fall was another $25,000.

Those two together = a margin call!

For those unaware, margin is a little different for futures than it is for stocks. In futures, you basically only buy stuff on the margin. In fact, the amount of $$ you put in is more of a down payment on what you're promising to do (ie. the future itself).

When the value of you futures has fallen, then your effective down payment shrinks, just as it effectively goes up when the value of your futures rise. If the overall value falls low enough, then the brokerage / exchanges says, "hey you don't have very much down - we need more cash asap or we're going to start closing out your positions." That's a margin call.

The funny thing is that they didn't give me a specific dollar amount. I suggested $10k, and they said, "OK." Problem was I had to scramble to get them their cash. Fortunately, Amelia wasn't working that morning and was able to buzz over to the bank to wire them some cash.

The thing is though, you really have to ask yourself if you're doing the right thing here, since the overall value of those futures can go back up, or they could continue to fall. Pretty scary.

But after I was able to get a grip, it made perfect sense to put more $$ in the account. First of all, a big chunk of it was the S&P short, which is a hedge against our 401k and the like. So it behaved perfectly, since our 401k and IRA and what-not went up during that period of time.

From the oil perspective, obviously I wish I wouldn't have bought those three Dec 2015 contracts at around $100/barrel when I could have gotten it for less than $95. But I still think $100/barrel will be very cheap in the not too distant future.

After seeing how much this oil market is bouncing up and down, I'm thinking that I'm going to try to "trade" a contract or two. That is, if it seems like the market is over-exuberant, I'll move down to 3 contracts, which will be my "long-term" state. If it seems like prices are too low, I'll add to make it 5 contracts. That last one is the risky one of course, so since I'm at 5 right now, I'll gamble a bit and sell one when prices rebound. We'll see. My worry is that this feels a little too much like gambling, and this is an awful lot of $$ to gamble with.