How To Calculate Margin?
January 04, 2023
One of the most important concepts to grasp when trading futures and options are the concepts of a margin. Before you begin , you must deposit an initial margin with the broker. The goal is to safeguard the broker if the buyer or seller loses money when trading futures and options due to price volatility.
You may trade in multiples of your starting margin. For example, if the margin is 10% and you wish to invest ₹10 Lakhs in futures and options, you must deposit ₹1 Lakh with the broker. This multiple in which you trade is known as leverage.
Before utilizing the F&O margin calculator, it's essential to understand the many kinds of margins, such as SPAN. To calculate margins, a SPAN employs complicated algorithms. The SPAN margin calculator calculates a starting margin equal to the portfolio's maximum loss under various situations. SPAN margins are updated six times per day therefore, the calculator's values may vary based on the time of day.
Then there's Extreme Loss Margin (ELM), which is the larger of the two: 1.5 times or 5% the standard deviation of the security's daily logarithmic returns over the previous six months. It is computed at the end of each month using rolling data from the previous six months. The outcome is valid for the next month.
To allow users to trade in the futures and options markets, the broker receives both SPAN and exposure margin upfront. The margin protects against the possibility of undesirable price fluctuation.
SPAN, which stands for Standard Portfolio Analysis of Risk, is the minimum margin required based on the risk and volatility of the underlying. It gets its name from the tool used to analyze it. In addition to the SPAN margin, the broker would get an exposure margin, which serves as an extra cushion to safeguard the broker's obligation against extreme price changes. The total margin is the product of the SPAN and the exposure margin.