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What is Margin?
In simple language, a BUYER and a SELLER have to deposit some TOKEN money with the broker before trading the contract. This token money is some % of the entire contract value. This token money is called the initial margin. INITIAL MARGIN =SPAN MARGIN + EXPOSURE MARGINWhat is the Initial margin?
The initial margin is the margin that is taken at the beginning of trading a FUTURE contract. This FUTURE contract can be of index or any stock. The EXCHANGE decides what percentage should be the SPAN margin and EXPOSURE margin. Whatever amount comes out to be the total contract value, a trader will have to keep that amount in his trading account as the initial margin.
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What is the Span margin?
SPAN margin is more important for a trader because if this margin remains less in your account then the exchange can also impose a penalty on you if you do not deposit more cash.SPAN margin is always calculated on the basis of volatility, higher the volatility, higher the margin, and lower the volatility, lower the margin. Another term we hear in FUTURES trading is “M2M”.
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Let me try to explain to you through an example what role margin and M2M play in FUTURES trading.
Suppose we bought one FUTURES of Reliance for 2000 rs on 1st October 2023 at 10.00 AM and sold it for 2100 rs on 10 October 2023. 1 lot size of Reliance is 500 and SPAN + EXPOSURE margin determined by the exchange is 10 %+2 %=12 %
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First, the entire contract value became 500 * 2000 (purchase price) = 1,000,000 (ten lakh rupees).
SPAN MARGIN = 10 % * 1,000,000 =1,00,000
EXPOSURE MARGIN = 2 %*1,000,000 =20,000
Total Rs 1,20,000 you will have to deposit if you want to trade 1 lot in Reliance.
How much was the profit in this trade 2100 -2000 =100 *500 =50,000
Now there would always be some difference in the closing price between October 1 and October 10 and margin and M2M are calculated on the basis of this difference.
One more thing that should always be kept in mind while trading in FUTURES is that the closing price is always considered the buying price for the next day, meaning your profit/loss is calculated on the basis of the closing price only. Based on your initial purchase price.
I have made an Excel sheet taking the example of Reliance, if you look at it carefully you will understand everything. If you don't understand in one go, watch it twice or thrice.
First, the entire contract value became 500 * 2000 (purchase price) = 1,000,000 (ten lakh rupees).
SPAN MARGIN = 10 % * 1,000,000 =1,00,000
EXPOSURE MARGIN = 2 %*1,000,000 =20,000
Total Rs 1,20,000 you will have to deposit if you want to trade 1 lot in Reliance.
How much was the profit in this trade 2100 -2000 =100 *500 =50,000
Now there would always be some difference in the closing price between October 1 and October 10 and margin and M2M are calculated on the basis of this difference.
One more thing that should always be kept in mind while trading in FUTURES is that the closing price is always considered the buying price for the next day, meaning your profit/loss is calculated on the basis of the closing price only. Based on your initial purchase price.
I have made an Excel sheet taking the example of Reliance, if you look at it carefully you will understand everything. If you don't understand in one go, watch it twice or thrice.
Our initial margin for buying 1 lot of Reliance on 1st October was Rs 1,20,000.
Now, on that day Reliance was closed, the total value was Rs 1,00,5000 in 2010 RS and the total margin was
Now, on that day Reliance was closed, the total value was Rs 1,00,5000 in 2010 RS and the total margin was
Rs 1,20,600, the margin increased to Rs 600, because at the time of trading our margin was Rs 1,20,000.
Now because the trader is getting a profit of 5000 rs on M2M, this 5000 rs is deposited in the trader's account on the same day. TOTAL CASH BALANCE in the trader's account was Rs 1,25,000.
Now it is clear here that CASH BALANCE is more than SPAN MARGIN so the trader does not need to invest extra money. Now the closing price (2010) will be taken into consideration to calculate the P&L for the next day.
2 October
3 October
In this way, you can see the data till October 10 in an Excel sheet.
On October 10, Reliance was sold at Rs 2100, which is Rs 50 more than the previous day's closing price, while on October 10, M2M was sold at Rs 25000. FINAL CASH BALANCE is 145000. These 25000rs are very quickly deposited into the trader's account by the broker. The special things that I tried to tell through this blog were SPAN MARGIN, M2M, and MARGIN CALL.
I hope that with my efforts you have understood what SPAN MARGIN, M2M, and MARGIN CALL are. I will continue to write blogs on many topics related to trading. Please share my blogs as much as you can.
On October 10, Reliance was sold at Rs 2100, which is Rs 50 more than the previous day's closing price, while on October 10, M2M was sold at Rs 25000. FINAL CASH BALANCE is 145000. These 25000rs are very quickly deposited into the trader's account by the broker. The special things that I tried to tell through this blog were SPAN MARGIN, M2M, and MARGIN CALL.
I hope that with my efforts you have understood what SPAN MARGIN, M2M, and MARGIN CALL are. I will continue to write blogs on many topics related to trading. Please share my blogs as much as you can.
FAQ
Q. What is the difference between Initial Margin, Span Margin, and Exposure Margin in futures trading?
A. The initial margin is the margin that is taken at the beginning of trading a FUTURE contract. This FUTURE contract can be of index or any stock. SPAN margin is more important for a trader because if this margin remains less in your account then the exchange can also impose a penalty on you if you do not deposit more cash. The Span Margin varies with market conditions, while the Exposure Margin remains constant.
Q. How is the Margin-to-Market (M2M) calculation used in futures trading, and why is it important?
A. M2M calculates the profit or loss based on the difference between the closing price and the purchase price of a futures contract.
Q. Can you explain the concept of a margin call in futures trading?
A. A margin call occurs when the trader's Cash Balance falls below the required margin due to adverse price movements.
Q. How is the closing price used in futures trading, and why is it significant?
A. The closing price is used to calculate Profit and Loss (P&L) in futures trading, and it is based on the closing price of the previous day. It's significant because it affects the trader's daily P&L and margin requirements for the next trading day.
Q. What happens if a trader's Cash Balance exceeds the margin requirement in futures trading?
A. If a trader's Cash Balance exceeds the margin requirement, there is no need to invest extra funds. The excess balance can be withdrawn or used for further trading. It acts as a buffer against margin calls.
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