Return on Margin Equity
Chapters in this video
- 0:00 Leverage and the tiny leash visual
- 1:35 The ROAM formula: net profit over initial margin
- 2:20 Futures margin is a performance bond, not a loan
- 2:56 Worked long example: 35% return on $2,000 margin
- 4:17 Exam trap: dividing by notional contract value
- 4:56 Exam trap: subtracting margin interest from futures
- 5:21 Worked short example with multiple contracts
- 6:55 Rapid-fire exam recap
What this video covers
- The return on margin equity (ROAM) formula: net profit divided by initial margin deposited, expressed as a percentage
- Why the denominator is the initial margin actually posted, not the full notional contract value, and how that creates the leverage effect
- How futures margin is a performance bond with zero interest charged, versus securities margin which is a loan with interest that erodes returns
- When and how to subtract commissions to arrive at net profit before applying the ROAM formula
- Scaling the formula across multiple contracts: total net profit divided by total initial margin deposited
- Exam trap 1: dividing by the full contract value, which badly understates the return and proves misunderstanding of leverage
- Exam trap 2: subtracting a margin interest charge, which is stock-market math that does not apply to futures
Read the full lesson, free
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