Mark to Market (MTM)
Mark to Market — or MTM — is the daily process of valuing open futures and options positions at the closing price and crediting or debiting the resulting profit or loss to the trader’s account. It is the mechanism that keeps the derivatives market financially safe and is the source of those overnight credits and debits F&O traders see every day.
Key takeaways:
- MTM is the daily revaluation of open positions at the official closing price.
- Profits are credited and losses debited each day, even though the trade has not been closed.
- It applies to futures and short option positions; long options are settled on closure or expiry.
- MTM losses can cause margin calls; persistent shortfalls lead to forced square off.
- For income-tax purposes, F&O profits and losses follow trade-based accounting, not MTM.
How daily MTM works
Take a single Nifty futures lot sold at 22,200. At the end of the day, Nifty futures settle at 22,150 — a 50-point fall. The short position gains 50 × 25 = ₹1,250. The exchange credits ₹1,250 to the trader’s margin account and debits ₹1,250 from the long counterparty’s account.
The next morning, the position is treated as if it were freshly opened at 22,150. Any further movement triggers a new MTM cycle. This daily reset prevents one party’s losses from snowballing without being recognised.
Why MTM exists
Imagine a futures contract held for three months. Without MTM, a buyer could rack up huge unrealised losses, then default at expiry. Daily MTM forces participants to settle their P&L every 24 hours, ensuring that the clearing corporation never has to chase enormous unpaid bills. It is the financial plumbing that makes the exchange-traded derivatives market trustworthy.
MTM and margin requirements
Your margin balance is the combination of initial SPAN + Exposure margin plus or minus MTM gains/losses. If MTM losses push your balance below the maintenance level, the broker issues a margin call. If you do not deposit additional funds promptly, the broker can square off your position to recover the shortfall.
MTM in options
For short option positions (call writes or put writes), MTM works as it does for futures — the change in premium is debited or credited daily. For long option holders, the broker usually does not pass through daily MTM as cash; instead, the option’s market value is reflected in your portfolio. Realised P&L appears only when you square off or on expiry.
Reading MTM in your ledger
Most brokers show MTM as a separate line item: open MTM, realised MTM, and the net change. The contract note breaks these out daily. Active F&O traders should reconcile MTM against their own records to spot any errors quickly.
Practical implications for traders
- Always keep a buffer of free margin so a single bad day does not trigger forced square off.
- Be aware that holding a losing position overnight crystallises that loss in your account temporarily — even if the price bounces back tomorrow.
- For tax reporting, do not get confused by MTM; you book profit or loss when the trade actually closes (futures expiry or buy-back).
Frequently asked questions
Is MTM the same as my P&L?
MTM is an accounting concept used daily by the exchange. Your real P&L is the difference between entry and final exit prices. They match over the full life of the trade.
What if my account balance goes negative due to MTM?
You must clear the debit by the next trading day. Brokers may stop further trading until funds are added.
Does cash equity have MTM?
No. Cash equity trades settle on T+1 in full; there is no daily revaluation while you hold shares.
How is MTM calculated for stock futures?
Same formula: (closing settlement price − previous settlement price) × lot size, with sign flipped if you are short.
