Initial Margin

The intuition

A futures trade creates an obligation worth the whole contract, but the exchange only asks for a deposit. The deposit is sized by asking: how much could this position lose before we could close it out if the trader stopped paying? For an index, that is roughly the move over one or two bad days. The clearing corporation runs the position through a grid of price and volatility scenarios, takes the worst loss, scales it, and calls that the SPAN margin. On top it adds an exposure margin, a flat percentage of the notional, so that a loss bigger than the scenarios imagined still has a cushion.

The deposit is not spent. It sits in the account as collateral while the daily mark to market moves the actual gains and losses in cash. Close the position and the margin is freed the same day.

Formula

Initial margin = SPAN margin + exposure margin

SPAN margin = worst scenario loss across the risk array (price moves up to the price scan range, in both directions, combined with volatility up and down), with calendar and inter-commodity offsets for portfolios

Exposure margin = exposure rate × contract value (lot size × price)

For a long option there is no initial margin: the premium paid is the maximum loss and is settled in full. For a written option the premium received is credited against the requirement.

Worked example (illustrative numbers)

Suppose NIFTY is at 24,000 and a trader buys one lot (65 units) of the near-month futures. Contract value is 24,000 × 65 = ₹15,60,000. Say the day’s SPAN file produces a scenario loss of 9% of notional, ₹1,40,400, and the exposure rate is 2%, ₹31,200. The initial margin blocked is ₹1,71,600, about 11% of the exposure taken.

Component	Basis	Amount per lot
SPAN margin	worst scenario loss, 9% of ₹15,60,000	₹1,40,400
Exposure margin	2% of contract value	₹31,200
Initial margin		₹1,71,600

The 9% and 2% are illustrative; the live figures come from NSE Clearing’s margin files and change with volatility and exchange circulars. The point is the ratio: the trader controls ₹15.6 lakh of index with under ₹2 lakh, so a 1% move in Nifty (₹15,600 per lot) is about 9% of the deposit.

Why it matters to an options trader

• It sets the capital cost of writing. A short put or short straddle is margined like a futures position; the return on the trade is the premium divided by this margin, not by the notional.
• It rises when you most need cash. SPAN scenarios widen when volatility rises, so a market falling hard raises the margin on every short position at the same time as the MTM drains the ledger.
• Spreads earn a discount. Because SPAN margins the whole portfolio, a long option that caps the loss of a short one cuts the requirement sharply, which is the real reason defined-risk strategies are capital-efficient.
• Hedge benefit is conditional. The margin relief on a spread is given only while both legs are open; close the long leg first and the full short-leg margin is demanded immediately.

Common mistakes

• Funding exactly the initial margin. The first losing day creates a shortfall; a buffer of 30 to 50% above the requirement is the normal practice for positions held overnight.
• Reading margin as risk. Margin is a two-day estimate. The position’s risk is the notional times the move you cannot rule out.
• Closing the hedge leg first. The margin on the remaining short leg jumps to its standalone figure; close the short leg first, or both together.
• Assuming the figure is fixed. It changes daily with the SPAN file and intraday on volatile days; the broker’s calculator is the only reliable number.

Indian-market specifics

• NSE Clearing computes initial margin with the SPAN system on a portfolio basis, using a price scan range derived from the exchange’s daily volatility estimate (an exponentially weighted moving average), scaled up, with a minimum scan range set by circular. The exposure margin is a fixed percentage of contract value; for stock futures SEBI set it at the higher of 5% or 1.5 standard deviations of daily log returns (SEBI circular of 2010 revising the earlier 10%), and index rates are published in exchange circulars.
• SEBI’s peak-margin framework (circular SEBI/HO/MRD2/DCAP/CIR/P/2020/127 of July 2020, phased in to 100% from 1 September 2021) requires the full SPAN plus exposure margin to be collected upfront, including for intraday positions.
• Short index options on expiry day attract an additional 2% extreme loss margin on NSE from 20 November 2024, part of SEBI’s October 2024 index-derivatives framework.
• Collateral may be cash, or approved securities pledged through the depository with a haircut; at least half of the requirement is generally expected in cash or cash equivalents under the clearing corporation’s rules.

FAQ

What is the initial margin for one lot of Nifty futures?

Roughly 10 to 12% of ₹15.6 lakh in calm markets; check the live calculator.

Is initial margin the same as SPAN margin?

SPAN is one part; initial margin is SPAN plus exposure.

Do option buyers pay initial margin?

No; buyers pay only the premium.

Why does my margin requirement change every day?

It is recomputed daily on price and volatility.

Related terms

• Exposure Margin, the second component
• SPAN Margin, the risk component
• Maintenance Margin, the threshold below which a call is made
• Mark to Market, the daily settlement the margin backs