Sizing a Crude Breakout Against a $30,000 Account
A customer with $30,000 of margin equity wants to buy 6 December crude oil futures at $60.00 (multiplier 1,000 barrels, so $1.00 = $1,000 per contract). Initial margin is $6,000 and maintenance is $4,400 per contract. He plans a protective stop at $59.10 and justifies the trade with 'a breakout to a three-month high on volume 40% above average, with open interest up 8,000 contracts,' while the latest inventory report shows stocks above the five-year average. He says he will 'just wire the call money later if it dips' and asks for a market order on the open.
1. Is the 6-lot plan feasible? Using a 10%-of-equity risk budget and his $59.10 stop, what is a defensible position size?
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Feasibility. 6 x $6,000 = $36,000 of initial margin against $30,000 of equity. Not feasible - the order would be rejected or the account would be in deficit on entry. Even 5 lots ($30,000) is unsound: it leaves exactly zero cushion, so the first adverse settlement produces a call, and any gap move produces a liquidation.
Risk-based sizing.
- Risk budget: 10% x $30,000 = $3,000.
- Stop distance: $60.00 - $59.10 = $0.90 = $900 per contract.
- $3,000 / $900 = 3.33, so 3 contracts.
At 3 lots: margin $18,000, free equity $12,000, planned loss at the stop $2,700 (9% of equity). There is room for a margin call before the stop is reached without forcing liquidation.
Add a caveat: $900 is the theoretical stop risk. Realized risk includes slippage and commissions. In a fast market a stop at $59.10 might fill at $58.95, taking 3 lots to about $3,150. If the customer wants the trade, 3 lots is the ceiling; 2 lots is defensible on execution-risk grounds. The 'wire it later' plan is not a sizing method - it assumes the market cooperates.
2. On 4 contracts at $60.00, at what price does he first face a margin call, and how much would the call be? Does the stop prevent that?
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Call trigger. Maintenance is 4 x $4,400 = $17,600. Equity = $30,000 - 4,000 x ($60.00 - P). Setting equity equal to maintenance:
4,000 x ($60.00 - P) = $30,000 - $17,600 = $12,400 $60.00 - P = $3.10 P = $56.90
At $56.90 the call is issued for the amount needed to restore equity to initial margin (4 x $6,000 = $24,000), i.e. a deposit of $6,400.
Does the stop help? In principle yes - a stop at $59.10 triggers about $3,600 of loss, far above the $56.90 call level. But three mechanics must be stated plainly:
- A stop order becomes a market order when elected. The fill price is wherever the market is, not the stop price; in a fast market the slippage can be large.
- If the contract goes limit down or locks, there may be no bid at all. The stop cannot execute, the position carries overnight, and the account can blow straight through both the maintenance level and the stop.
- A stop-limit would control price but risks not being filled at all, which is arguably worse when the position is leveraged.
So the stop reduces loss; only a long option (or a much smaller position) caps it. If he insists on 4 lots, that risk should be documented in the account record.
3. Evaluate the evidence he cited. What does the volume and open-interest picture actually confirm, how does the inventory data conflict with it, and what should the AP do with that conflict?
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Technical read. A new three-month high with volume 40% above average and open interest up 8,000 contracts is the strongest form of a breakout signal: rising price plus rising volume plus rising open interest means new positions are being established on both sides and the longs are winning - new money is driving the move, not short covering. Compare the weaker variants: a rally on falling open interest is largely short liquidation and tends to stall; a rally on very thin volume is easily reversed. So his technical evidence is genuinely bullish and internally consistent.
Fundamental read. Inventories above the five-year average describe a well-supplied market and argue for a bearish or at least rangebound bias, and a supply cushion that can absorb demand surprises.
The conflict. Neither signal is wrong; they answer different questions. Technicals describe positioning and trend now; the inventory report is backward-looking and may lag a change in demand - which is one way a market prices in a shift before it shows up in the data. But the reverse is also common: a breakout against heavy stocks fails when the buying is momentum-driven and the physical market does not follow. A reasonable resolution:
- Do not increase size to 'prove' a view; conflicting evidence argues for the smaller end of the size range.
- Demand confirmation from the physical market (crack spreads, export sales, prompt spreads) before adding.
- Predefine what invalidates the trade: a close back below the breakout level, or failure to hold the $59.10 stop, means the thesis is wrong regardless of the inventory report.
- Document the rationale and the conflict in the account record; the AP's job is to make sure the customer understands both sides, not to resolve the disagreement for him.
Note also that 'market order on the open' is a poor fit for a breakout trade: it fills at an unpredictable auction price and can be far from the level he is trying to buy, undermining both the entry and the stop distance the sizing depends on.