Why Futures Use Daily Variation Margin While Options Do Not
Summary
The note explains daily variation margin by contrasting futures with assets such as stocks and options. When an investor buys a stock or an option, cash changes hands at the initial transaction; later price moves alter the account’s marked value. The position’s profit or loss can therefore be reflected in the asset’s current value without daily cash settlement of the change.
A futures contract generally begins without the full purchase price changing hands. Because the account holds a commitment rather than the underlying asset bought for cash, daily settlement transfers gains and losses as prices move and updates account equity. The answer illustrates this with a crude oil futures sale: the original trade price is needed to determine the position’s accumulated gain when the futures price changes. This is a simplified explanation; it does not cover contract specifications, margin requirements, or differences in clearing and settlement practices.
Key ideas
- Stock and option positions involve an initial premium or purchase payment that contributes to account value.
- A futures trade establishes a commitment without exchanging the full underlying value at initiation.
- Daily variation margin transfers futures gains and losses and updates account equity.
- The original futures trade price is needed to measure accumulated profit or loss.
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# Why do Futures Contracts use variation in the US, but options don’t? # Why do Futures Contracts use variation in the US, but options don’t? Sorry if this is obvious, but I was reading up on Futures and the concept of variation margin intrigued me. Options settle like Stocks and have unrealized gain/loss without affect on cash flow during the position, but Futures have a system of variation where the price difference of the commodity/stock must be paid after each day, and they settle where the future buyer is paying market price, but the variation covers the difference. Why is it done this way? Is there a specific reason or did it just happen to be setup that way? ## Answer by kdragger (score 3) https://quant.stackexchange.com/a/65907 Tricky right? The reason is that when dealing with stocks or options or any sort of spot market asset, there is an original cash settlement. For instance: You have an account with $4000 and you buy AMZN for 3500. 3500 leaves your account and 1 share of AMZN comes in. Your account is now 500 + 1 share AMZN. AMZN price goes to 4000. Your account is now worth 4500. Options work the same. You pay the premium (or receive) and then it gets marked to market. Prices moves and the pnl is change in account value based on the sum of all assets. Futures are different. No cash changes hands. Settlement occurs as the future hitting your account and a "future" commitment to pay (receive) whatever you bought (sold). How do you figure out the equity of your account? Well, you need to know the prices transacted and then the changes over time. Selling crude oil at 70 via the Nov 21 future does not put 70K into your account. Just a future. Futures go to $60. The only way to know your pnl is to know where you sold it and that is your equity -- in this case 10K.
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