Whether you're an experienced broker or new to trading, understanding margins is essential for futures and derivatives trading. Futures margin acts as a deposit—a performance bond—to ensure traders meet financial obligations, unlike stock margins which function more like down payments.
Understanding Futures Margin: Key Concepts
Futures margin differs from margin trading. While margin trading involves borrowing funds to invest, futures margin is a percentage of the contract's total value maintained in your trading account to open a position.
Why Futures Margins Matter
Futures trading carries inherent risk due to price volatility. Margins mitigate this risk by covering potential losses. Two primary types of margins apply:
Initial Margin: Paid when entering a position, combining:
- SPAN Margin: Calculated using Value at Risk (VaR) to cover 99% of potential single-day losses.
- Exposure Margin: Additional buffer for extreme volatility.
- Mark-to-Market (MTM) Margin: Adjusted daily based on price fluctuations to reflect current losses/gains.
Calculating Initial Margins: A Step-by-Step Guide
Initial margins vary by contract and volatility. For example, a notional value of ₹708,580 might require a 12.61% initial margin (₹89,338 per lot). Key margin categories include:
- Carry Forward (Normal Margin): 10–15% of notional value for overnight positions.
- Intraday (MIS) Margin: Reduced to 40–50% of normal margin for same-day trades.
- CO/BO Order Margin: As low as 30–33% for bracket/cover orders with built-in stop-losses.
MTM Margining in Practice
MTM applies only to carry-forward positions. If prices drop below your entry (e.g., ₹409 to ₹395), brokers may issue margin calls. Failure to meet requirements triggers automatic position closure.
FAQs on Futures Margins
1. What happens if I don’t meet margin requirements?
Your broker may liquidate positions to cover deficits.
2. Can margins change during a contract’s lifecycle?
Yes, margins adjust based on market volatility and contract expiration.
3. How are SPAN margins calculated?
Using statistical VaR models to estimate worst-case daily losses.
4. Are intraday positions subject to MTM?
No, MTM applies only to carry-forward trades.
5. Why do distant contracts have higher margins?
Longer durations increase exposure to volatility.
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Futures margins are a cornerstone of risk management, balancing opportunity with financial safeguards. By understanding these principles, traders can navigate markets confidently.
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