The exchange requires a minimum margin for each trade, with specific margins varying by trading segment. Here are the different types of margins you need to understand:
What is SPAN and Why Should You Care?
If you’ve ever dabbled in F&O (Futures and Options) trading on Zerodha, you’ve probably come across the term “SPAN margin” and wondered what on earth it means. Well, I’m here to break it down for you in simple terms without all the complicated jargon that makes most traders’ eyes glaze over.
SPAN stands for “Standard Portfolio Analysis of Risk” – fancy name right? But don’t let that intimidate you. It’s basically just a system that the stock exchanges use to figure out how much money you need to keep in your account when trading derivatives.
When I first started trading F&O on Zerodha, I was confused about why I needed to maintain different types of margins If you’re in the same boat, this article will clear things up for you.
SPAN Margin Explained Simply
SPAN margin is essentially the exchange’s way of saying, “Hey trader, we need you to keep this much money as security in case this trade goes south.” The exchange calculates this amount based on several factors:
- The current price of the underlying security
- How volatile that security has been
- Other market variables that might affect risk
The beauty (or frustration, depending on how you look at it) of SPAN margin is that it’s dynamic. Zerodha and the exchanges recalculate it throughout the trading day as market conditions change. This means the margin requirements for your positions can fluctuate while you hold them.
What About Exposure Margin?
Now, you might be thinking SPAN margin is all you need to worry about. Nope! There’s also something called “exposure margin” that Zerodha collects.
Exposure margin is like an extra layer of security that the exchanges require on top of SPAN margin. Think of it as an additional cushion to cover risks that even the sophisticated SPAN calculations might miss.
Here’s how exposure margin is calculated on Zerodha:
- For index futures and index option selling: 2% of the contract value (Spot price × Lot size)
- For stock futures and option selling: 3.5% of the contract value OR 1.5 standard deviations of the logarithmic returns of the underlying share over the past 6 months (whichever is higher)
Total Initial Margin Requirement
When you put SPAN margin and exposure margin together, you get what’s called the “initial margin.” This is the total amount you need to have in your Zerodha account before entering an F&O position.
The good news is that Zerodha makes it easy to see this requirement before you place a trade. When you’re about to enter a position on Kite (Zerodha’s trading platform), it displays the margin required right on the order window.
Why Does Zerodha Use This System?
You might be wondering, “Why all this complexity? Why can’t I just trade freely?”
Well, margins exist to protect both you and the market. Derivatives are leveraged instruments, meaning small price movements can result in big gains or losses. Without margin requirements, traders could take on excessive risk, potentially leading to defaults that could destabilize the entire market.
Zerodha implements these margin requirements as mandated by the exchanges (NSE, BSE, etc.) and regulatory bodies like SEBI. They’re not trying to make your life difficult – they’re following rules designed to keep the markets functioning smoothly.
Real-World Example of SPAN and Exposure Margin on Zerodha
Let me walk you through a hypothetical example:
Imagine you want to buy one lot of Nifty futures on Zerodha. Let’s say:
- Current Nifty spot price: ₹20,000
- Lot size: 50
The contract value would be: ₹20,000 × 50 = ₹10,00,000
The SPAN margin might be calculated as ₹80,000 (this varies based on volatility).
The exposure margin would be 2% of ₹10,00,000 = ₹20,000.
So your total initial margin requirement would be:
SPAN (₹80,000) + Exposure (₹20,000) = ₹1,00,000
This means you’d need at least ₹1,00,000 in your Zerodha account to take this position, even though the actual contract value is ₹10,00,000. That’s the power of leverage in F&O!
Common Questions About SPAN on Zerodha
Does the margin change after I’ve taken a position?
Yes! This is super important to understand. SPAN margin is recalculated throughout the day based on market conditions. If volatility increases or the market moves against your position, your margin requirement might increase.
If you don’t maintain sufficient margin, Zerodha might issue a margin call or even square off your position to minimize risk. That’s why we always recommend keeping some extra funds as a buffer.
Are SPAN margins different for different products?
Absolutely. Different derivatives have different risk profiles, so their margin requirements vary. Index derivatives generally have lower margins than individual stock derivatives because indices are typically less volatile than individual stocks.
Can I reduce my margin requirements?
Yes! One of the best strategies is using spreads or hedged positions. When you take offsetting positions (like buying and selling options at different strike prices), the combined position has lower risk than each individual position, resulting in margin benefits.
Zerodha’s system automatically calculates these benefits, so you’ll see a lower margin requirement for spread positions compared to standalone positions.
Tips for Managing Margins on Zerodha
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Always check margin requirements before trading: Use Zerodha’s margin calculator to know exactly how much you need before placing an order.
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Maintain a buffer: Don’t use 100% of your available funds for trading. Keep at least 20-30% extra to handle margin increases due to market volatility.
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Understand overnight margins: Margin requirements often increase for positions held overnight. What seems like a well-margined position during the day might face a margin shortfall after market hours.
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Use Zerodha’s margin pledge feature: If you have shares in your demat account, you can pledge them to get additional margin for F&O trading.
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Monitor your positions regularly: Keep an eye on your margin utilization in the Kite dashboard, especially during volatile market conditions.
SPAN vs. Other Margin Systems
Before SPAN became the standard, exchanges used various other margin systems that were often less sophisticated and efficient. SPAN’s advantage lies in its ability to analyze portfolio risk as a whole rather than treating each position in isolation.
This means if you have offsetting positions (like I mentioned earlier with spreads), SPAN recognizes the reduced risk and requires less margin than simpler systems would.
My Personal Experience with SPAN on Zerodha
When I first started trading options on Zerodha, I made the classic newbie mistake of ignoring margin requirements. I entered a position thinking I had enough funds, only to receive an urgent notification about a margin shortfall when the market moved against me.
That was my wake-up call to really understand how SPAN and exposure margins work. Now, I always use Zerodha’s margin calculator before placing any F&O trade, and I maintain at least 30% extra funds as a safety buffer.
Margin Calls and Shortfalls on Zerodha
If your account balance falls below the required margin, Zerodha will issue a margin call. This is basically them saying, “Hey, you need to add more funds ASAP!”
If you don’t add the necessary funds, Zerodha may square off some or all of your positions to bring your account back within margin limits. This is never a pleasant experience, as it often happens at unfavorable prices during volatile markets.
To avoid this situation:
- Set up alerts for your margin utilization
- Keep extra funds in your account
- Consider reducing position sizes during highly volatile periods
- Use stop-losses to limit potential losses
Conclusion: Mastering SPAN Margins for Successful F&O Trading
Understanding SPAN and exposure margins is crucial for anyone trading F&O on Zerodha. While it might seem complicated at first, once you grasp the basic concepts, it becomes second nature.
Remember that margins exist to protect both you and the market from excessive risk. By respecting margin requirements and planning your trades accordingly, you can trade derivatives more safely and confidently.
I recommend using Zerodha’s margin calculator regularly and keeping up with any regulatory changes that might affect margin requirements. The financial markets are always evolving, and staying informed is key to successful trading.
Have you ever faced a margin call on Zerodha? What strategies do you use to manage your margins? I’d love to hear your experiences and tips in the comments!
Happy trading, and may your margins always be sufficient!
Var + ELM (upfront margin)
The upfront margin is the minimum amount you need to initiate a trade. In the equity segment, the exchange mandates (WEB) collection of at least 20% of the traded value, or Value at Risk (VaR) + Extreme Loss Margin (ELM), whichever is higher, for both delivery and intraday trades.
However, Zerodha collects the full value of delivery trades, also known as Cash and Carry (CNC) trades. For intraday trades, Zerodha offers up to 5 times leverage (equivalent to 20% of the traded value) through Margin Intraday Square off (MIS) and Cover Order (CO) for equities.
Adhoc margins are additional margins that exchanges impose as needed. The exchange may levy adhoc margins when it identifies increased risk due to potential defaults, market volatility, or other conditions that might result in greater losses. These margins are over and above the usual required margins, safeguarding markets and participants against unforeseen risks.
Why Zerodha collects the full amount for equity delivery trades
Zerodha collects the full amount for equity delivery trades rather than 20% of VaR + ELM because when you purchase stocks using the CNC product type, you intend to take delivery of them. This requires full payment as its not a leveraged trade.
The next trading day following your purchase, Zerodha, as the broker, must pay this money to the clearing corporation to secure your stocks for delivery. Hence, Zerodha collects 100% upfront margin for CNC trades. However, you can buy stocks for delivery with lesser margins using the Margin Trading Facility (MTF).