Margin

The intuition

A futures position or a written option is a promise to pay an amount that is not yet known. The clearing corporation guarantees that promise to the other side, so it holds a deposit from you large enough to cover a bad day's move, and it tops the deposit up as the position goes against you. That deposit is margin. It is not a cost; it is your own money, returned when the position is closed, less any losses. The cost of margin is the opportunity cost of having it locked, plus the risk of being forced out if it runs short.

An option buyer has no such promise outstanding. The premium is paid in full and the worst case is already settled, so there is nothing to collateralise.

How the requirement is built

• SPAN margin. The clearing corporation revalues your entire F&O portfolio under a grid of price and volatility scenarios and takes the worst loss as the requirement. Because it looks at the portfolio, a written call hedged by a long call or a long future needs far less SPAN than the written call alone.
• Exposure margin. A percentage of contract value added on top of SPAN, higher for stocks than for indices, to cover risks the scenarios do not capture. It is not reduced by hedges.
• Initial margin = SPAN + exposure, blocked when the position is opened.
• Mark-to-market. Futures and written options are revalued daily; losses are debited from the account and must be made good, gains are credited.
• Delivery margin. For in-the-money stock options and stock futures approaching expiry, an additional margin is phased in over the last sessions because physical delivery is coming.

Worked example (illustrative numbers)

Suppose NIFTY is at 24,000 and a trader writes one lot (65 units) of the 24,500 call for the monthly expiry, collecting a premium of ₹60, which is ₹3,900. Suppose the broker's margin calculator shows SPAN of ₹1,05,000 and exposure margin of ₹32,000 for the position. The trader must have ₹1,37,000 free before the order is accepted; the ₹3,900 premium is credited against it, so about ₹1,33,000 of the trader's funds are blocked.

Now suppose Nifty rallies 400 points. The 24,500 call is close to the money, SPAN is recomputed at perhaps ₹1,40,000, and the option's mark-to-market loss is debited. The requirement has risen by about a third without the trader doing anything; if the account cannot cover it, the broker may square off the position. Had the trader bought the 25,000 call alongside, turning the position into a call spread, SPAN would have been a fraction of these figures because the scenarios cap the loss.

The buyer on the other side of that 24,500 call paid ₹3,900 and never hears from the margin system again.

Why it matters to an options trader

• It sets how many lots you can write. Return on a written option is premium divided by margin blocked, and margin per lot on an index runs well into six figures.
• It is the hidden risk in selling options. Margin rises exactly when the position is losing, so the capital needed is largest at the worst moment. Keeping a buffer above the initial requirement is the difference between riding out a move and being squared off at its extreme.
• Hedges are cheap in margin terms. Converting a naked written option into a spread cuts SPAN sharply because the scenario loss is capped. Many writers hedge mainly to free margin.
• Peak margin ends intraday leverage. A position cannot be opened on partial margin and closed before the close; the full requirement must be present at every intraday snapshot.

Common mistakes

• Funding exactly the initial margin. Any adverse move produces a shortfall and, under peak-margin rules, a penalty; brokers may also square off.
• Forgetting event margins. Exchanges and brokers raise requirements ahead of budgets, elections and results; a position sized to normal margins can become under-funded overnight.
• Ignoring delivery margin on stock options. In the last sessions before expiry, in-the-money stock positions attract steeply rising margins; closing or rolling earlier avoids them.
• Pledging collateral without cash. Exchanges require a portion of margin in cash or cash equivalents; pledged shares alone may not satisfy the requirement.
• Treating margin as the cost of the trade. It is a deposit. The costs are brokerage, STT, exchange charges and the loss if the position goes wrong.

Indian-market specifics

• SEBI's peak-margin framework, phased in from December 2020 and fully in force from September 2021, requires 100% of the applicable margin upfront and measures compliance at intraday peaks; shortfalls attract penalties.
• SPAN and exposure margins are set by NSE Clearing and revised intraday; the exchange publishes margin files several times a day.
• Option buyers pay the premium in full; there is no leverage on buying options in India.
• Lot sizes after the January 2026 revision (Nifty 65, Bank Nifty 30, FinNifty 60, Sensex 20) determine margin per lot, since SPAN scenarios are applied per unit and multiplied up.
• Index options are cash-settled, so no delivery margin applies to them; stock options and futures are physically settled and do attract it.

FAQ

Do option buyers need margin?

No. The premium paid is the full liability.

What is the difference between SPAN and exposure margin?

SPAN is the scenario-based, portfolio-level risk estimate; exposure is a fixed percentage buffer added on top.

What is peak margin?

SEBI's requirement that full margin be present upfront and at every intraday peak, with penalties for shortfalls.

Why did my margin requirement rise without my adding positions?

SPAN is recomputed through the day and rises with volatility and as written options approach the money; exchanges also raise margins around events.

Related terms

• Lot Size, the multiplier behind every margin figure
• Futures Contract
• Gamma, the risk that makes written-option margin rise on a move
• Assignment and delivery at expiry