Sharekhan Blog

All You Must Know About F&O Margin

  • Jul 12, 2023

Futures trading requires margins to protect investors from large losses due to price fluctuations. If you invest in Nifty futures and the index falls, you stand to incur a notional loss. Because of the inherent uncertainty in the market, margins are required to protect against potential losses. 

How exactly does margining in futures work? Two primary F&O margins are often gathered. Position Initial Margin (SPAN ELM margins) must be paid in full at the moment the position is opened. First, let's take a look at the profit margins you'll have from the start.

Futures trading initial margin requirements

When you open a position in your trading account, the initial margin is calculated based on the expectation that you would maintain the position until the contract's expiration. This original margin is sometimes referred to as a carry forward margin. SPAN margins, which are based on the statistical notion of VAR (Value at Risk), and ELM margins, which are based on exposure, make up the initial margin. Prior to entering a deal, both margins must be deposited. In 99 percent of situations, the initial margin ought to be sufficient to cover the cost of giving up your position. As a matter of thumb, the initial margin will be higher if the stock's volatility is higher. The first margin solely considers the risk for the current day.

How do you determine the starting margin?

Let's break down the first margin requirement for stock futures and index futures.

The aforementioned exchange-mandated margins are the bare minimum necessary for each individual F&O position. Brokers may collect more than the required margin if they so want, but they cannot collect less. Margin increases reflect the increased risk associated with contracts that extend farther into the future. Initial profit margins are thus much larger for volatile equities than for steady ones. As an instance, Yes Bank's opening margins will be much greater than NTPC's.

Are margins reduced for intraday trades?

If you want to maintain your future position, the regular margin applies. What if you decide throughout the day that you want to close the position? Consequently, the MIS will be reduced because of the decreased risk. The intraday margin is 40% of the initial margin for index futures and 50% of the first margin for stock futures. In order to prevent mass RMS closures, the trader must identify the order as an MIS order and shut it before 3.15 p.m.

Cover orders get preferential margins

Finally, the margins for Bracket Orders (BO) and Cover Orders (CO) are much smaller than the MIS margin (CO). To protect against potential losses, a cover order always includes a stop loss on the intraday deal. The Bracket Order is a closed bracket order since it specifies a stop loss and a profit objective. In this situation, the margin will be 30 percent of the usual margins. In the same way, as MIS orders must be closed throughout the trading day, BO/CO orders must do the same.

Negative MTM margins due to price fluctuations

The MTM margin is a kind of mark-to-market adjustment. For those who have invested in RIL futures at Rs.1240, a significant drop in price below that level might be disastrous. Brokers will often verify that your margin balance is enough to pay the SPAN margin when the stock price drops. Keep in mind that the initial margin is the sum of the spread and the equity liability margin. That's still in the allowed range. A Margin Call will be sent by the broker to recover any shortfall in the margin if the stock price falls significantly, causing the margin account to fall below the SPAN margin threshold. These MTM margins apply solely to open carry positions and not to intraday, BO, or CO positions.


As the last question, how does margining work with options? It's a lot easier to do. A person who purchases an option may lose no more than the amount of the premium. As a result, no further margins than the premium margin are required. However, the margins for options sales are identical to those for futures.

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