The Margin is the amount that a broker receives when an individual buys or sells any options or futures. Margin is a protection against adverse price movements. There are generally two types of margins: the SPAN margin or exposure margin.
Both span and exposure margins can be used to analyze risk. The SPAN margin, which is the minimum required SPAN margin for option and future writing positions in compliance with the exchanges mandates, is blocked. Exposure margins are blocked after the SPAN buffer to protect against any atm losses. We will be discussing what a SPAN is and how each function.
SPAN, which stands for Standard Portfolio Analysis of Risk, is a method used to measure portfolio risk. It is named after the SPAN software that was used to calculate it. The SPAN margin, also known as the VaR margin in Indian stock markets is the minimum margin required to trade in the market. It is calculated using a standardized portfolio analysis of risk (F&O) strategy. Using certain tools, one can calculate their margin using multiple positions before placing an order. F&O traders with sufficient margin to cover potential losses will typically use the SPAN margin.
SPAN margin works in the following way: for each position in a portfolio the margin is calculated to account for any intraday movements. This is done by calculating a range of risk factors that determine the potential gains or losses for a contract under a variety of conditions.
SPAN margins can vary depending on security and the risk one is taking. The SPAN margin requirement of a single stock will differ from that for an Index because the risk of a portfolio being more volatile than an Index. A general rule of thumb is that the higher the volatility, the lower the SPAN, and the correspondingly higher the SPAN requirement, the better.
Many calculators are available to assist you in calculating SPAN margin requirements. However, the SPAN margin is the same regardless if the trade is intraday or overnight. Brokers may offer lower upfront fees to encourage traders because the risk factor is lower.
The broker may charge an exposure margin above and beyond the SPAN margin. This is often done at their discretion. It is also known as an extra margin and it is charged to protect the broker from any potential liability that could arise from market swings. The SPAN margin and exposure margins can be viewed in two ways. First, the SPAN margin is a calculation that is based on assessing risk and volatility factors. The exposure margin, on the other hand is similar to an additional margin value that depends on how much exposure one takes. The SPAN margin can vary from
The underlying rule for calculating exposure margins is that the margin for index future contracts must be 3% of the contract's total value. If a NIFTY future contract were valued at $1,000,000, then the exposure margin would be 3%, or 30,000.
The initial margin must be adhered to by the investor when he initiates a futures trading. This is simply what is calculated after the SPAN, exposure margins have been combined. The exchanges will block the entire margin once it is confirmed. In 2018, new guidelines mandate that both margins must be blocked in order to hold an overnight position. This is a violation that will result in a penalty.
Writers of futures and options must have sufficient margin to cover future losses. Writers use two main entities to maintain this margin: the SPAN margin or exposure margin.
To calculate the total margin, you will need to use both the SPAN and exposure margins. The sum of the SPAN, exposure margins and total margin is called the total margin. The SPAN margin can vary depending on future options and other factors, but the exposure margin is likely to stay the same. Brokers might offer incentives to potential customers by lowering exposure margins.