Why does a futures position cost you money every single day it moves against you?
Because a future does not accumulate a paper loss. It settles, in cash, every single day. This one mechanical fact is what makes futures safe for the clearing house and dangerous for anyone thinly funded — and it is the difference that most people meet only after it has cost them something.
The daily cycle
Every trading day, after the close, the clearing house:
- Computes a settlement price for each contract by a published procedure.
- Marks every open position to that price.
- Calculates each account's gain or loss since yesterday's settlement.
- Moves the cash. Losing accounts are debited, winning accounts are credited. Same day, real money.
- Resets every position's reference price to today's settlement.
Step 5 is the subtle one. After day one, your entry price stops mattering. Each morning your position is re-based to yesterday's settlement. A futures position is therefore best understood not as one long trade but as a chain of one-day trades, each settled in cash.
The credited money — called variation margin — is genuinely yours; a winner can withdraw the excess above initial margin. The debited money is genuinely gone. There is no such thing as an unrealised loss in futures. There is only a sequence of realised ones.
Why this makes the system safe
Credit exposure never has time to accumulate. Recall the forward in Unit 1: the winning side's $80,000 claim built silently across five months and existed only as a promise. In a future, that same move is collected in daily slices. If a participant cannot pay a slice, they are closed out that day — while the exposure is one day's worth, not five months' worth. The clearing house, by design, is never owed a large sum by anyone.
Why this makes it dangerous for you
Your solvency is tested daily, not at expiry. Which produces the defining hazard of the instrument: you can be entirely correct about the direction and still be finished before you get there. Being right eventually is no defence against a cash call tomorrow morning. The market does not have to prove you wrong; it only has to outlast your funding.
Three days, one contract, plainly
Long 1 crude contract at $80.00. Notional $80,000. Each $1.00 = $1,000.
- Day 1 settles $79.20. Change from entry: −$0.80 → −$800 debited.
- Day 2 settles $80.10. Change from yesterday's settlement, not your entry: +$0.90 → +$900 credited.
- Day 3 settles $79.60. Change from yesterday: −$0.50 → −$500 debited.
Net cash movement: −800 + 900 − 500 = −$400.
Check it against the position: $79.60 − $80.00 = −$0.40 × 1,000 barrels = −$400. They agree, and they always will.
The point of the check
The daily slices always sum to the total position P&L. Nothing is created or destroyed by daily settlement. What it changes is when you must have the cash — and that timing, not the total, is what breaks accounts. A trade that finishes $400 down can require you to produce far more than $400 along the way, at moments you do not choose.
Try it now
- A month of daily candles is below. Take any 10 consecutive sessions and read their closes.
- Compute each day's change × the contract size. That is the cash you would have paid or received on each of those days — real money, moving both ways, every afternoon.
- Now add up only the negative days. That total is the cash you had to be able to produce on demand, regardless of where the price finished. Measure the whole ten sessions end to end and note how much smaller the net move is than the sum you just computed. The funding requirement is the number professionals size against, and it is never the net.