Using a margin calculator while trading futures and options

There are many types of instruments you can trade with in the share market. Most people know about traditional market instruments like shares, mutual funds and government bonds but are usually confused about futures and options. But, what is future and option trading? This is a trade involving two types of derivatives or financial instruments that derive their value from an underlying asset traded as per a contract. The assets could be stocks, currencies or even commodities. Margins play an integral role in this type of trade. Here’s a brief explanation of futures and options and the use of margin calculator while trading in these derivatives.

What is F&O trading?

Futures and option trading is done through contracts, under which buyers and sellers in the stock, currency and commodities markets are obligated to purchase or sell their underlying assets at predetermined prices.

• Under a futures contract, traders agree to buy or sell a fixed quantity of a given asset at a fixed price on a fixed future date. This allows the trader to escape the risks associated with price fluctuations. Traders trading in futures are obligated to buy or sell the assets, irrespective of whether they have to assume profits or losses on the contract expiration date.
• An options contract on the other hand, gives the trade the option, and not the obligation to sell or buy the underlying asset at a fixed date in future. Traders can utilise the call or put options under which they can respectively buy or sell underlying assets, but there is no obligation. Options are considerably less risky investments than futures; however the returns earned through options are also low.

Why are margin calculators used in F&O trading

Interested F&O traders need to understand the concept of margins. Investors are required to deposit what is known as an initial margin with their brokerage firm before they can begin trading futures and options. Brokers ask you to deposit this margin in order to protect themselves from losses endured by you due to price volatility. You may trade in multiples of the initial margin you deposit. For instance, you need to deposit?100,000, if you wish to invest?1,000,000 in F&O, which makes the initial deposit 10% of the total amount you wish to invest.

Since margins may differ from one index to the other, you need an F&O margin calculator. Leading stock exchanges in the world, including the Stock exchanges in India use what is known as the SPAN (Standard Portfolio Analysis of Risk) calculator to calculate margins.

Using the SPAN calculator

The SPAN calculator is an easily available online tool that you can find on your investment broking firm’s website. Here are the steps you need to follow to calculate your margin.

1. Select the exchange on which you wish to trade
2. Select the product you wish to trade (options or futures)
3. Use the drop down menu to select the script that you wish to trade
4. Enter your trade’s lot size

Once you enter the above mentioned details in the SPAN margin calculator, the calculator computes the SPAN margin instantly. You can also see the figures of your exposure margin as well as your total margin.

Final word: So before you begin trading in futures and/or options, it is extremely important that you calculate your SPAN margin. Using the F&O margin calculator proves beneficial since it uses historical volatility in order to calculate the current margins you need. The calculator takes into account the worst case scenarios before arriving at the margin value and calculates the margins across different exchanges.

Maithili Pawar is a finance professor. She has written on share market basics. Through this article, she has provided detailed information on stock market.