Using a margin calculator

One of the crucial things to understand while trading in futures and options is the concept of the margin. Before you start trading in F&O, you need to deposit what is called an initial margin with the broker. The aim is to protect the broker if the buyer or seller makes losses while dealing in futures and options due to price volatility.

You can trade in multiples of the initial margin deposited. For example, if the margin is 10 percent, and you want to invest Rs 10 lakh in futures and options, you will need to deposit Rs 1 lakh with the broker. This multiple that you trade in is called leverage.

Of course, margins differ from index to index and share to share. So, you need an F&O calculator to figure out the margin to trade in the equity or index F&O that you want.

SPAN Margin calculator

Before using F&O margin calculator, it’s essential to know the types of margins like SPAN. SPAN is short for Standardized Portfolio Analysis of Risk. A SPAN margin calculator uses complex algorithms to determine margins. The SPAN margin calculator arrives at the initial margin equal to the highest loss a portfolio would suffer under several scenarios (around 16). SPAN margins are revised six times a day, so the calculator will give different results depending on the time of day.

Value at Risk margin

The NSE F&O margin calculator includes the value at Risk (VaR) margin. It estimates the probability of loss of value of an asset based on the statistical analysis of historical price trends and volatility. Margins will depend on whether securities are listed by Group I, Group II or III. There is also an Index VaR for the various indices.

Extreme Loss Margin

Then there is Extreme Loss Margin (ELM), which is higher of the two: five percent or 1.5 times the standard deviation of daily logarithmic returns of the security price in the last six months. It is calculated at the end of each month by taking the rolling data of the past six months. The result is applicable for the next month.