Can a Futures Trader Lose More than Their Initial Margin?
Yes, a futures trader can lose more than their initial margin. While the margin system is designed to prevent this through daily MTM and margin calls, a rapid, severe price movement (a "gap risk") can cause the account equity to fall below zero before the clearinghouse or broker can liquidate the position.
This is particularly a risk during times of extreme market volatility or when markets are closed.
Glossar
Futures Position
Contract ⎊ A futures position represents a binding agreement to trade an underlying asset at a specific price on a future settlement date.
Extreme Market Volatility
Disruption ⎊ Within cryptocurrency derivatives and options markets, extreme market volatility represents a fundamental disruption of anticipated price continuities, often stemming from exogenous shocks or cascading liquidations.
Margin System
Collateral ⎊ The margin system, across cryptocurrency derivatives, options, and traditional financial instruments, fundamentally relies on collateralization.
Clearinghouse
Finality ⎊ A decentralized clearinghouse function provides near-instantaneous transaction finality by acting as the central ledger for trade confirmation and settlement across derivatives.
Account Equity
Valuation ⎊ Account equity, within cryptocurrency, options, and derivatives, represents the residual claim on an account’s assets after deducting all liabilities, functioning as a real-time measure of net worth exposed to market fluctuations.
Daily MTM
Valuation ⎊ This process determines the current fair market value of open derivative positions at the close of each trading day.