Margin

Margin is what lets you control a large position with a fraction of its value, and it is the engine of leverage in F&O. It is not a fee; it is a refundable security deposit that backs your trade.

How it works

When you buy or sell a futures contract, you do not pay the full contract value. You deposit a percentage as margin. The exchange's clearing corporation sets this to cover a worst-case daily move, so even if the market gaps against you, your losses are collateralised.

Margin has two main components. SPAN margin covers the maximum likely one-day loss based on a risk model. Exposure (or ELM) margin is an extra buffer on top. For options *sellers*, margin works much like futures; option *buyers*, by contrast, simply pay the full premium upfront and need no separate margin.

In India

SEBI has steadily tightened margining to protect retail traders from over-leverage. Under the peak margin framework, brokers must collect the full required margin upfront, and the clearing corporation samples positions at random times during the day, so you must maintain margin throughout the session, not just at the close. Intraday leverage that brokers once offered has been sharply curtailed.

From February 2025, option buyers must pay 100% of the premium at order entry, and certain expiry-day margin benefits (like calendar-spread offsets on the expiry day) were withdrawn, raising margin needs around expiry.

Why it matters

Leverage cuts both ways: a small adverse move can wipe out your margin entirely, because you are exposed to the full contract size while having deposited only a slice of it. This is why F&O carries far more risk than buying stocks.

Common mistakes

Ignoring a margin call, the broker's demand to top up funds when losses erode your deposit, leads to forced square-off, often at the worst possible price. Trading on the bare minimum margin leaves no cushion for volatility. And pledging shares as margin still leaves you exposed to losses, the collateral haircut does not reduce your risk, it only funds the position.