What is SPAN Zerodha?

4 – Margins, the bigger perspective

Let us now relook at margins keeping M2M in perspective. The margin needed to open a futures trade is referred to as “Initial Margin (IM),” as was previously mentioned. Initial margin is a certain % of the contract value. We also know –.

Initial Margin (IM) = SPAN Margin + Exposure Margin

Few financial intermediaries operate in the background to make sure that every trader’s futures trade—or any trade, for that matter—goes through without a hitch. The broker and the exchange are the two main financial intermediaries.

It goes without saying that the broker and the exchange will suffer financial consequences if a client defaults on an obligation. Therefore, if both financial intermediaries must have sufficient margin deposits to protect them from a potential client default, they must do so.

Actually, this is precisely how it operates: “Exposure Margin” is the margin blocked above and beyond the SPAN to account for any MTM losses, and “SPAN Margin” is the minimum required margins blocked in accordance with the exchange’s mandate. Keep in mind that the exchange specifies both the exposure margin and the SPAN. Therefore, the client must follow the initial margin requirement when starting a futures trade. The exchange blocks the entire initial margin (SPAN + Exposure).

Of the two margins, SPAN Margin is more crucial because failing to have it in your account will result in a fine from the exchange. If the trader wants to carry his position overnight or the following day, the SPAN margin requirement must be strictly adhered to. Because of this, SPAN margin is also known as the “Maintenance Margin” on occasion.

In order to determine the appropriate SPAN margin for a given futures contract, the exchange uses a sophisticated algorithm that calculates the SPAN margins on a daily basis. One of the primary inputs utilized in this algorithm is the stock’s “Volatility.” We will go into great detail on the concept of volatility in the upcoming module. For now, just keep in mind that the SPAN margin requirement increases in tandem with anticipated increases in volatility.

An additional margin known as the exposure margin, which ranges from 4% to 5% of the contract value

Let’s now examine a futures trade while maintaining both the margin and the M2M viewpoints. The trade details are as shown below –.

As you may be aware, if you trade with Zerodha, we offer a margin calculator that clearly shows the necessary amounts for exposure and SPAN margin. Naturally, we will go into more detail about the usefulness of this convenient tool later on. But for now, you could check out this margin calculator.

Keeping the trade details mentioned above in mind, let’s examine the simultaneous roles that margins and M2M play throughout the course of the transaction. The dynamics are displayed in the table below as they vary day to day:

I hope the table above doesn’t intimidate you; it’s actually very simple to understand. Let us go through it sequentially, day by day.

10th Dec 2014

The HDFC Bank futures contract was bought at Rs. at some point during the day. 938. 7/-. The lot size is 250. Hence the contract value is Rs. 234,675/-. The box on the right shows that SPAN is 7. 5%, and Exposure is 5% of CV, respectively. Hence 12. 5% of CV is blocked as margins (SPAN%20 %20Exposure); this is effective up to a total margin of Rs. 29,334/-. The first cash that the broker blocks is also regarded as the initial margin.

Going ahead, HDFC closes at 940 for the day. At 940, the CV is now Rs. 235,000/- and therefore, the total margin requirement is Rs. 29,375/- which is a marginal increase of Rs. 41/-in contrast to the margin needed at the beginning of the trade The client already has an M2M profit of Rs., so he doesn’t need to add this money to his account. 325/- which will be credited to his account.

The trading account’s total cash balance is equal to Cash Balance M2M.

= Rs.29,334 + Rs.325

= Rs.29,659/-

It is evident that the cash balance exceeds the entire required margin of Rs. 29,375/- hence there is no problem. Additionally, the reference rate for the M2M of the following day is now Rs 940/-.

11th Dec 2014

The next day, HDFC Bank drop by Rs. 1/- to Rs. 939/- per share, impacting the M2M by negative Rs. 250/-. This amount is deducted from the cash balance and credited to the individual who made it. Hence the new cash balance will be –.

= 29659 – 250

Also, the new margin requirement is calculated as Rs. 29,344/-. There is nothing to be concerned about because the cash balance is obviously greater than the necessary margin. Additionally, the M2M reference rate for the following day is reset to Rs. 939/-.

12th Dec 2014

This is an interesting day. The futures price fell by Rs. 9/- taking the price to Rs. 930/- per share. At Rs. 930/- the margin requirement also falls to Rs. 29,063/-. However, because of an M2M loss of Rs. 2250/- the cash balance drops to Rs. 27,159/-(29409–2250), which is below the required total margin Is the client obliged to contribute the extra funds since the cash balance is less than the entire margin requirement? Not really.

Recall that the SPAN margin is the most sacred of the two margins—exposure and SPAN. As long as you have the SPAN Margin, most brokers let you keep your positions. (or maintenance margin) They will give you a call and ask you to contribute more money as soon as the cash balance drops below the maintenance margin. If that doesn’t happen, they will forcibly close the positions. The broker’s request for you to deposit the necessary margin funds is commonly referred to as the “Margin Call.” If your broker is sending you a margin call, it indicates that you have too little cash on hand to maintain the position.

Going back to the example, the cash balance of Rs. 27,159/- is above the SPAN margin (Rs. 17,438/-); hence there is no problem. The trading account is debited for the M2M loss, and the reference rate for the M2M of the following day is reset to Rs. 930/-.

I hope you now have a better understanding of how margins and M2M interact. I also hope you can see how the exchange can effectively address a potential default threat under the margins and M2M. The margin M2M combination is essentially a failsafe way to guarantee that defaults don’t happen.

I will now take the liberty to skip over the remaining days and go straight to the final day of trading, assuming you are beginning to understand the dynamics of margins and M2M calculation.

19th Dec 2014

The trader chooses to cash out and close the deal at 955. The closing rate from the prior day, which is Rs., serves as the reference rate for M2M. 938. So the M2M profit would Rs. 4250/-which is added to the cash balance of Rs. from the prior day 29,159/-. The final cash balance of Rs. 33,409/- (Rs. 29,159 + Rs. 4250) as soon as the trader closes the deal, the broker will release it.

What about the total P

Method 1) – Sum up all the M2M’s

P&L = Sum of all M2M’s

= 325. 250. 2250. 4750. 4000. 2000. 3250. 4250.

= Rs.4,075/-

Method 2) – Cash Release

P

= 33409 – 29334

= Rs.4,075/-

Method 3) – Contract Value

P&L = Final Contract Value – Initial Contract Value

= Rs.238,750 – Rs.234,675

=Rs.4,075/-

Method 4) – Futures Price

P

Buy Price = 938. 7, Sell Price = 955, Lot size = 250.

= 16.3 * 250

= Rs. 4,075/-

You can see that no matter how you calculate, you get the same P.

1 – Things you should know by now

In futures trading, margins are obviously very important because they allow one to use leverage. Margin actually provides the necessary financial twist to a “Futures Agreement” (in contrast to a spot market transaction). Because of this, it’s crucial to comprehend margins and their various aspects.

But before we go any farther, allow us to outline some things you ought to already be aware of. These are ideas that we have learned over the last four chapters; going over these key ideas again will help us retain everything we have learned. You should go back and review the earlier chapters to make sure you understand any of the following points.

• Future is an improvisation over the Forwards.
• The forwards market’s transactional structure is carried over into the futures agreement.
• You can profit monetarily from a futures agreement if you have a precise direction perception of the asset price.
• The corresponding underlying in the spot market provides the futures agreement with its value. For instance, the TCS Spot market’s underlying determines the value of TCS Futures.
• The spot market’s underlying price is mirrored in the futures price. Because of the futures pricing formula, an asset’s spot price and its futures price differ. This topic will be covered later in the module.
• The lot size and expiration date of a futures contract are predetermined agreement variables. Futures contracts are standardized. The lot size is the smallest amount that the futures contract specifies. Contract value is equal to Futures Price * Lot Size; the expiration date is the final day that the futures agreement can be held.
• In order to sign a futures agreement, a deposit of a margin amount, which is determined to be a specific 20% of the contract value, must be made. With margin, we can leverage a large value transaction by taking exposure to it with a small initial deposit.
• We digitally sign the agreement with the counterparty when we transact in a futures contract, which binds us to uphold the terms of the agreement when it expires.
• The futures agreement is tradable. This implies that you can hold onto the futures contract until you are certain of the asset’s direction; if your opinion changes, you can terminate the futures agreement. You are not required to hold onto the agreement until it expires. If the price moves in your favor, you can even hold the futures agreement for a short while and profit financially. favor Purchasing Infosys Futures at 9:15 AM in 1951 and selling it by 9:17 AM in 1953 would be an example of the aforementioned point. Given that Infosys has 250 lot sizes, one could potentially earn Rs 500/-(2 * 250) in just two minutes. You can also decide whether to keep it for a few days or until it expires.
• Equity futures contracts are cash-settled
• A minor alteration in the underlying has a significant effect on the P due to leverage.
• Gains realized by the purchaser equal losses incurred by the vendor, and vice versa.
• With a futures instrument, you can move money from one pocket to another. Hence it is called a “Zero Sum Game. ”.
• The higher the leverage, the higher the risk.
• The payoff structure of a futures instrument is linear.
• The Securities and Exchange Board of India (SEBI) oversees the regulation of the futures market. In the futures market, there has never been a counterparty default because of SEBI’s vigilant oversight.

I’d say you’re headed in the right direction if you can understand the previously mentioned points with clarity. To ensure you understand the concept, go back and read through the previous four chapters if you have any questions about any of the aforementioned points.

In any case, if you understand this far, let’s concentrate more on the idea of margins and mark to market.

3. Margins

FAQ

What is span method in stock market?

What is the difference between span and exposure?

How is span calculated?

What is the difference between VaR and span margin?

What is Zerodha span margin calculator?

Zerodha Span Margin Calculator – YouTube The Zerodha SPAN calculator is the first online tool in India that let’s you calculate comprehensive margin requirements for option writing/shorting or for m

What is Zerodha F&O margin calculator?

Zerodha F&O margin Calculator part of our initiative “Zerodha Margins” is the first online tool in India that let’s you calculate comprehensive margin requirements for option writing/shorting, futures and multi-leg F&O strategies when trading equity, F&O, Currency and Commodity on NSE and MCX respectively.

Where can I find Zerodha margin available?

Alternatively, it can also be downloaded by visiting console.zerodha.com/reports/downloads. The Margin Available section provides details of cash balance, margin received from pledging shares (collateral margin) and value of shares sold from the demat account, which can be considered towards the margin, also referred to as Early Payin (EPI) margin.

What is Zerodha F&O calculator?

The Zerodha F&O calculator is the first online tool in India that let’s you calculate comprehensive margin requirements for option writing/shorting or for multi-leg F&O strategies while trading equity, F&O, commodity and currency before taking a trade. No more taking trades just to figure out the margin that will be blocked!