You have certainly heard of terms like SPAN and exposure margin if you have ever worked in futures and options (F&O) trading. They may appear to be financial jargon at first, but knowing them is essential if you want to trade securely.
In essence, margins are the up-front money you must deposit with your broker in order to enter derivatives trading positions. It is a combination of two factors, exposure margin and SPAN margin, each of which has different roles in trading risk management.
This blog will explain what margin in F&O trading means, how exposure and SPAN margins are determined, and why they are important for all traders to understand.
What is the Margin in Trading?
You must pay an initial deposit before you buy or sell contracts when trading futures and options (F&O). This is called margin. Think of it as the minimum balance your broker requires in your trading account to ensure you can cover potential losses and avoid defaulting on your trades.
You can take on positions that are bigger than your available capital would normally allow because of margin, which acts as a financial buffer. Rather than paying the entire contract value when you enter a trade, you only pay a percentage, called the initial margin. For instance, all you need to open a position on a ₹900k equity futures contract with a 15% margin requirement is ₹135k.
This total margin is generally made up of two parts:
1. SPAN Margin
2. Exposure Margin
What is SPAN Margin?
In 1988, the Chicago Mercantile Exchange (CME) created the risk-based margining system known as SPAN or Standard Portfolio Analysis of Risk. SPAN margin simulates a number of outcomes, including price and volatility changes, to calculate the worst-case loss your portfolio could sustain. It allows for offsets between correlated trades by calculating margins for your entire portfolio rather than just for individual positions.
Since SPAN uses scenario analysis instead of a fixed-percentage margin, the amount of margin needed differs according to the time for expiry, portfolio composition, and volatility. If positions offset one another, SPAN can reduce capital requirements by evaluating a full basket of positions at once.
What is Exposure Margin?
The exposure margin is an extra safety net on top of the SPAN margin. It is collected to protect against any sudden changes in the market that the SPAN system might not have taken into account.
You could say that, a “safety net” that brokers or exchanges need in case something goes wrong. This is fixed as a percentage of the total contract value and changes based on the asset and the rules of the exchange.
For Example
Let us say you want to buy Nifty Futures.
SPAN Margin – ₹1,50,000
Exposure Margin – ₹40,000
Total margin needed = SPAN Margin + Exposure Margin = ₹1,90,000
To take the position, you need to have this much money in your account.
Read Also: What is Stock Margin?
Difference Between SPAN Margin & Exposure Margin
| Basis | SPAN Margin | Exposure Margin |
|---|---|---|
| Assessment Basis | Scenario-based, portfolio-wide risk calculations | Fixed percentage buffer on trade value |
| Flexibility | Varies with volatility; best for F&O trades | Static cushion in addition to SPAN |
| Usage | F&O segments using SPAN model | All leveraged positions, across trades |
| Offset Benefits | Allows netting across long/short in a basket | No offsetting, each trade stands alone |
Why is Margin & SPAN Important for Traders?
Understanding how margin and SPAN margin work is not only beneficial but also necessary if you trade futures and options or use any form of leverage.
1. They Help You Manage Risk
The purpose of margin, particularly SPAN, is to ensure that you have adequate money in your account to deal with unforeseen market fluctuations. If things go wrong, it acts as a safety net to shield you and your broker from suffering significant losses.
2. Efficient Use of Capital
Leverage allows you to make larger trades without having to pay the entire amount up front, which is one of the best things about margin. By examining your complete portfolio, SPAN goes one step further. You might require less margin if certain trades (such as a call and a put) balance each other out. This means greater adaptability and more economical use of your funds.
3. Adhering to SEBI Regulations
You have undoubtedly heard of SEBI’s margin regulations if you trade in India. Before you enter a trade, brokers must gather exposure margins and SPAN. If you do not meet expectations, you may be penalised or, worse, have your positions automatically closed. You can prevent surprises and maintain control by being aware of this.
4. Maintaining Flexibility in Real Time
Markets are dynamic. The SPAN margin is recalculated every day, sometimes even within a single day. You can make timely adjustments to your positions, lower your exposure, or add money if you are aware of these changes.
Conclusion
Futures and options trading offer huge possibilities, but they also carry a lot of responsibility. Knowing how exposure margin and SPAN margin operate can significantly impact how safely and effectively you trade. Both are equally significant. You can prevent unnecessary surprises like margin calls and auto square-offs when you understand how much margin you need and why.
Therefore, always check your margin needs before making a trade, put aside a small amount as a buffer, and adjust your strategy accordingly. You’re already playing the game better than most when you know the rules.
Frequently Asked Questions (FAQs)
For what reason do I require both margins?
The SPAN margin covers the expected risk. It is based on different market scenarios and is meant to protect against likely price changes. On the other hand, exposure margin protects against unexpected risks.
Do these margins fluctuate daily?
SPAN margin can change when market volatility increases. Unless regulations change, the exposure margin usually remains constant.
Who determines the amount of margin I require?
Your broker complies with the regulations set forth by the exchange (such as the NSE). Additionally, SEBI closely monitors to ensure that everything is secure and fair.
What happens if my account doesn’t have enough margin?
You may receive a margin call from your broker requesting additional funds. They may automatically end your position if you don’t.
Is it possible to lower the SPAN margin that I must pay?
Indeed! Both your overall risk and your SPAN requirement decrease when you make hedged trades, such as combining a call and a put.
