Mark to Market (MTM)
ES: Mark to Market (MTM) PT: Marcação a Mercado
Daily valuation of positions at market prices: how it drives your margin, why it turns unrealised losses into real cash flows, and what it implies for tax.
What marking to market is
Mark to market is the process by which a position is revalued at the prevailing market price rather than held at cost. Applied to a stock portfolio it is little more than an accounting convention: you see an updated value, but nothing material happens until you sell. Applied to margined derivatives — futures, short options, leveraged positions — it stops being a convention and becomes the mechanism that determines how much capital the broker demands from you each day and, in the case of futures, how much cash actually enters or leaves your account at every session close.
In futures: unrealised losses that are genuinely charged
In futures markets, marking to market is real daily settlement. At each session close the clearing house computes each position’s result and transfers cash between accounts: if your contract lost $800 today, that $800 leaves your account tonight. It does not accumulate as an unrealised loss until you close; it is paid. This mechanism is what makes the futures system robust against default — nobody accumulates a huge undetected debt — and also what produces margin calls: if the balance falls below maintenance margin, you must top up immediately or the broker liquidates. Many traders fail not by being wrong about direction, but by being unable to sustain the daily cash flow while waiting to be proved right.
In options: margin that shifts under your feet
Short options positions do not generate daily flows the way futures do, but they are revalued every day, and margin requirements depend on that revaluation. The surprising effect is that margin increases as the position deteriorates, and it does so through two channels at once: because the underlying has moved against you and because implied volatility has spiked. In other words, required capital grows precisely when you have least room to manoeuvre. This dynamic is what turns a manageable loss into a forced liquidation, and explains why the capital cushion needed to sell premium is far larger than the initial margin on a position opened in calm conditions suggests.
Model valuation and the illiquid-asset problem
Marking to market presupposes a market with an observable price. When there is none — deep out-of-the-money options with no trading, distant expirations with no open interest, bespoke instruments — value is estimated with models, known as mark to model. It is a practical necessity and also a well-documented source of trouble: during the 2008 financial crisis, much of the uncertainty arose precisely because model-valued assets turned out to be worth far less when someone tried to sell them. For a retail trader the everyday version of this problem is more modest but real: the value your platform shows for an illiquid option is the midpoint between a widely separated bid and offer, and if you try to close you will discover that price never existed.
The tax dimension
In the United States, certain instruments are compulsorily marked to market for tax purposes at year end: Section 1256 contracts — futures, options on futures, and broad-based index options — are treated as sold and repurchased on 31 December even if still open, and the result is split 60% long-term and 40% short-term regardless of holding period. In addition, traders who obtain trader status may elect Section 475 mark-to-market treatment voluntarily, which converts all results to ordinary income and eliminates wash-sale rules. These are US-specific regimes; other jurisdictions differ and it is worth verifying with a local adviser.