Before engaging in futures and options trading it is important to know the exact margin amount. Margin is the collateral that a trader needs to deposit with his/ her broker or stock exchange to cover up his/ her credit risk. To borrow money from one’s broker to purchase securities, investors must pay a certain amount of margin.
What is a margin calculator?
A margin calculator is an online tool that helps people calculate the margin required for futures and options (F&O) trading. Investors can also use it for calculating margins for buying and selling options.
Traders can use an F&O margin calculator to calculate the following types of margins:
- SPAN margin
Standard Portfolio Analysis of Risk (SPAN) is a basic component of futures and options trading that measures the maximum loss possible on a portfolio under various circumstances. People must note that the SPAN margin undergoes revision multiple times a day. In other words, this value changes based on the time when a person is using an F&O calculator.
- Extreme loss margin
The purpose behind the calculation of extreme loss margin is to understand what losses may occur beyond the VaR margins.
Value at Risk (VaR) margin
A VaR margin accounts for a detailed analysis of the price movements of an asset. It uses the result for risk measurement and to determine the probability of losses in an asset’s value.
- Mark-to-market margin
A mark-to-market (MTM) margin is the evaluation of the accounts’ fair value such as assets and liabilities as it may fluctuate over time. The main objective of MTM is to give an assessment basis on the current market situation by taking a company/ institution’s present financial situation into consideration.
- Exposure margin
This component is accumulated as an additional margin for protecting broker liability in an adverse market.
How to use a margin calculator?
A person needs to follow these steps to use a margin calculator:
Step 1: Choose the name of the stock exchange.
Step 2: Choose the product type depending on whether it is futures or options.
Step 3: Select the symbol. Remember that this will be a variable field depending on the type of contract one chooses.
Step 4: Insert the net trading quantity. Finally, select buy or sell depending on the aim of trading and pay the required margin.
How to calculate F&O margins?
Some of the important points regarding calculating margins required for F&O trading are discussed below:
- For shorting options and futures
Its formula is as follows:
SPAN + exposure + delivery margin charged during physical settlement + additional margins as levied by the stock exchange.
- For buying options
Its formula is as follows:
Premium amount + any other delivery margin that was charged before the physical settlement.
Some additional factors that users need to keep in mind are that one will benefit from the hedged margin as mandated by the SPAN calculation stipulated by a stock exchange. Moreover, brokers charge additional margins above the existing margins levied by the stock exchange. It is for the sole purpose of covering additional risks, if any.
Before the advent of margin calculators, people used to calculate it manually, which had limitations. Apart from being time-consuming, processes were subject to mathematical inaccuracies. It is much better to use a margin calculator.
When someone uses an F&O margin calculator, all they need to do is enter the correct details regarding their trades. Some of the important information that users need to enter are product type, product quantity, stock code, price and action, and expiry date – buy or sell. After entering these details, traders get to see the required margin amount within seconds.
Is the margin the same for equity and futures, and options?
Margin is applicable for intraday trade for equity. A margin of 20% of the trade value may be applicable.
However, futures and options are a part of the derivatives market, where people must pay the margin amount to their stockbroker to complete trades.
A margin calculator is a helpful financial tool that helps traders understand how much they should deposit with their respective stockbroker. Users need to insert certain information related to their trade. After this, the calculator will display the result within seconds.
Another important benefit of an F&O margin calculator is that it promotes transparency between brokers and traders. Furthermore, it helps people to take important decisions.
