If the margin cover proves insufficient, the securities dealer can require you to provide
additional collateral (via a margin call).
As far as American-style options in particular are concerned, you must also be prepared
for the fact that the option may be exercised at a highly unfavourable time
when the markets are against you. If you are then obliged to make physical settlement,
it may be very expensive or even impossible to acquire the corresponding
You must be aware that your potential losses can be far greater than the value of the
underlying assets you lodged as collateral (margin cover) either when entering into
the contract or thereafter.
Your potential losses can be far greater than the value of any underlying assets you
may have lodged as collateral (margin cover). You could in a worst case lose your
entire capital invested.
What is a margin?
When you buy or sell (short) an underlying asset on the futures market, you must
supply a specified initial margin when entering into the contract. This is usually a
percentage of the total value of the contracted instruments. In addition, a variation
margin is calculated periodically during the life of the contract. This corresponds to
the book profit or loss arising from any change in value in the contract or underlying
instrument. The way in which the variation margin is calculated will depend on
the rules of the exchange concerned and/or the conditions of the contract.
As the investor, you are obliged to deposit the required initial and variation margin
cover with the securities dealer for the entire life of the contract.
Theoretically, there is no limit to how far the market value of the underlying can rise.
Hence, your potential losses are similarly unlimited and can substantially exceed the