TL;DRThe process of settling your futures account at the end of every trading day. Gains are credited and losses are debited in real time. You don't wait until you close the trade.
Mark to market is the daily settlement process in futures trading. At the end of each trading day, the exchange calculates the settlement price for every futures contract. Your account is then credited or debited based on the difference between your entry price (or the previous day's settlement) and today's settlement price.
This happens automatically. You don't need to close your position to realize gains or losses. If you bought ES at 5,200 and today's settlement is 5,215, you have $750 credited to your account tonight (15 points x $50). Tomorrow, the process resets from 5,215.
Mark to market means your account balance changes every day, even on positions you haven't closed. Gains from open positions are immediately available as real cash in your account. You can use them as margin for new positions tomorrow.
Losses are immediately deducted. If your position lost $1,000 today, your available margin drops by $1,000 tonight. If this pushes you below maintenance margin, you'll get a margin call before trading resumes.
There's no such thing as an unrealized gain or loss in futures the way there is in stocks. Everything is realized daily.
The settlement price is calculated by the exchange, usually based on trading activity during the final minutes of the session. The exact methodology varies by product.
For ES and NQ, the settlement price is typically based on the volume-weighted average price during the closing period. For less liquid contracts, the exchange may use different methods including bid-ask midpoints.
The settlement price is the reference point for all daily mark-to-market calculations, margin requirements, and the starting point for the next trading day.
In the United States, futures contracts receive favorable tax treatment under Section 1256 of the tax code. Regardless of how long you held the position, 60% of your gains are taxed as long-term capital gains and 40% as short-term.
At year end, all open positions are marked to market for tax purposes. This means you owe taxes on unrealized gains even if you haven't closed the position. The benefit is the blended 60/40 rate, which is lower than ordinary income tax for most traders.
Daily P&L flow
You buy 1 ES at 5,200 on Monday. Settlement prices: Monday 5,210, Tuesday 5,195, Wednesday 5,225.
Monday: +10 points = +$500 credited. Tuesday: -15 points from Monday's settlement = -$750 debited. Wednesday: +30 points from Tuesday's settlement = +$1,500 credited. Net P&L: +$1,250. Each day's gain or loss is settled independently against the prior day's close.
Margin call from mark to market
You have $13,000 in your account and buy 1 ES contract (maintenance margin $11,500). ES drops 40 points overnight.
The 40-point drop is a $2,000 loss, debited at settlement. Your account drops to $11,000, which is below the $11,500 maintenance margin. You receive a margin call and must deposit funds or your position gets liquidated.
Thinking unrealized profits aren't real until you close the trade
In futures, daily profits are credited to your account as real cash. Treat every day's P&L as realized, because it is.
Forgetting that mark to market can trigger margin calls on open positions
Even if you plan to hold a position long term, you need enough margin to survive daily fluctuations.
Not accounting for the 60/40 tax rule on year-end open positions
Open futures positions are marked to market on December 31 for tax purposes. Factor this into your year-end tax planning.