Many new futures traders are surprised by something that has nothing to do with whether their view is right. Even before they close a position, cash leaves or enters their account every evening.
That is mark-to-market settlement. This article explains how it works, why it exists, and what it means for the cash you need to hold.
What mark-to-market means
A futures contract is an agreement to buy or sell the underlying at a set price on a future date. If gains and losses were only settled at expiry, a trader on the losing side could build up a large loss over several weeks and then fail to pay. The other side would be exposed to that default.
To prevent this, exchanges settle futures every day. At the end of each trading day, every open futures position is valued at that day's settlement price. The change from the previous day's value is paid in cash: losers pay, winners receive. This daily process is called mark-to-market, often shortened to MTM.
The next day, the position starts again from the new settlement price, and the process repeats until the position is closed or expires.
Two things follow. First, a futures loss is not a paper loss waiting for recovery — it is paid in cash the same evening. Second, the margin you deposited is not what pays for losses day to day. Margin is collateral that stays blocked; MTM is the cash that actually moves.
A worked example over three days
Suppose you buy one lot of an index future at 24,000. Figures below are per unit; multiply by the lot size for rupees.
Day 1: the index future settles at 23,850. Your position is down 150 points from your entry. That amount is debited from your account in cash at the end of the day.
Day 2: it settles at 24,100. From the previous settlement of 23,850, that is up 250 points, credited to your account.
Day 3: you sell at 24,050. From the previous settlement of 24,100, that is down 50 points, debited.
Total: −150 + 250 − 50 = +50 points. That equals your exit price minus your entry price, 24,050 − 24,000. The overall result is the same as if everything were settled at the end; MTM only changes when the cash moves.
But notice day 1. A trader who had exactly the margin required and no spare cash would have faced a shortfall that evening, even though the position ended in profit two days later. That is the practical problem MTM creates.
Why you need cash beyond margin
Margin requirements tell you how much must be blocked to hold the position. They do not include the cash needed to pay daily losses.
Losses must be paid as they occur. If the account does not have enough free cash to cover an MTM debit, it shows a shortfall. Brokers typically require it to be made good quickly, and may close positions if it is not.
MTM generally needs cash, not collateral. Traders who fund margin by pledging shares often find that pledged collateral cannot be used to pay MTM losses, which usually need to be met in cash. Check your broker's policy, because this catches many people.
Margin can rise at the same time. On a volatile day, the market moves against you and the exchange may also raise margin requirements. Both draw on the account together.
A practical rule: keep a cash buffer in the account large enough to absorb several days of adverse moves at a realistic size, not just the margin shown at entry. A position that would be fine to hold for a week is useless if a two-day dip forces a close.
How options differ
Bought options: the buyer pays the full premium upfront. There is no daily cash settlement of gains and losses on the position itself. The value fluctuates, but no cash moves until the option is sold or expires.
Sold options: the seller receives the premium and must maintain margin. As the market moves against a sold option, the margin requirement typically rises. That is not MTM settlement in the futures sense, but the cash effect can feel similar: more funds need to be available as losses grow.
Physical settlement on stock derivatives: stock futures and stock options held into expiry can lead to delivery, with its own requirements on cash or shares. That is separate from daily MTM.
So the daily cash movement described above is specific to futures. But any short or leveraged derivative position requires more available funds than the initial margin suggests.
Managing MTM in practice
Size with the buffer in mind. Decide position size based on how much daily movement you can absorb in cash, not on how many lots the margin allows.
Watch the end of the day, not just the price. MTM is calculated on settlement price, which can differ from the last price you looked at.
Do not confuse MTM with realised results. A day of MTM credits does not mean the trade has worked; it means the position was worth more at that day's close.
Keep pledged collateral and cash separate in your mind. Know how much free cash is available for MTM after margin is blocked.
Read your contract notes and ledger. Daily MTM entries appear there. Reconciling them is the easiest way to understand exactly what has moved and why.
An account with a clear ledger
Daily contract notes and ledger entries show each MTM debit and credit. Free to open
Settlement procedures, margin rules and broker policies on collateral are set by the exchanges, clearing corporations, SEBI and brokers, and change from time to time. This is educational material, not advice, and no position is recommended. We run no tips group and no signal service, we manage nobody's money, and no return is promised. Derivatives can lose more than the amount blocked against them.
Disclosure: the account-opening link on this page is under Atul Shrivastava's Zerodha Authorised Person registration (NSE AP Reg: AP2516003481; Zerodha Broking Ltd. SEBI Reg: INZ000031633) and earns a revenue share. TheFinBaba is not a SEBI-registered Investment Adviser — this content is educational, not investment advice.
Frequently Asked Questions
What is mark-to-market in futures?
Daily settlement of futures positions. At the end of each trading day, every open position is valued at the settlement price, and the change from the previous day is paid in cash: losers pay, winners receive.
Why is money debited from my account when I have not closed my futures position?
Because futures losses are settled in cash every day through mark-to-market. The debit reflects the fall in value since the previous day's settlement.
Is margin used to pay MTM losses?
Margin is collateral that stays blocked to hold the position. MTM losses need free funds, and generally must be met in cash rather than pledged securities. Check your broker's policy.
Do options have mark-to-market settlement?
Bought options do not; the premium is paid upfront and no cash moves until they are sold or expire. Sold options require margin that can rise as the market moves against them.
How much cash should I keep for futures MTM?
Enough to absorb several days of adverse moves at your position size, beyond the margin blocked. Size positions based on that buffer rather than on the maximum the margin allows.
Related Reading
- The options course, for Noida
- How margin differs from MTM
- Futures and options side by side
- Using futures as a hedge
- Why futures trade above spot
- Leverage and daily cash needs
Disclaimer: TheFinBaba provides educational content only - this is not investment advice. Trading involves risk of loss.
