SPAN and Exposure Margin: How F&O Margins Are Computed
Sell one Nifty futures lot and your broker blocks roughly 11% to 12% of the contract’s value before the order goes through. That amount is not a broker fee or a round number someone picked: it is the sum of two charges set by the clearing corporation, SPAN margin and exposure margin.
SPAN margin is the worst-case one-day loss that the clearing corporation’s risk model estimates for your entire F&O portfolio, and exposure margin is a flat additional buffer stacked on top of it to cover risks the model does not capture. Together they make up the initial margin you must have in the account before you trade.
This piece breaks down what each layer does, works through the arithmetic on one index futures lot and one short call, and explains why the number moves overnight.
The two layers of an F&O margin
The clearing corporations, NSE Clearing and ICCL, compute both parts and publish the parameters. Your broker only collects them.
What SPAN actually simulates
SPAN stands for Standard Portfolio Analysis of Risk. It is a scenario engine, not a percentage: the model revalues your positions in one underlying under scenarios where price moves across a defined range and implied volatility rises and falls. The largest loss becomes your SPAN margin.
SPAN is portfolio based. Hold a long call and a short call in the same expiry and the loss in one scenario is partly offset by the gain in the other, so the pair costs far less than the naked short alone. That is why spreads are affordable and naked shorts are not.
SPAN also rises with volatility, since the price scan range is built from it. A jumpy market raises margin on a position you never touched.
What exposure margin adds
Exposure margin is simpler: an extra charge, usually a percentage of contract value, covering gap risk that a one-day scenario grid can understate. For index derivatives it has long sat near 3%, and single stock derivatives attract more. Treat both as illustrations and confirm current rates in the clearing corporation’s circular.
A worked example: margin on one Nifty futures lot
Suppose Nifty is at 25,000 and the lot size is 75. Exchanges revise lot sizes periodically, so check the current contract specification on the NSE site.
Contract value = 25,000 multiplied by 75 = Rs 18,75,000. Now the two layers, using illustrative parameters:
- SPAN margin from the risk file: Rs 1,55,000
- Exposure margin at 3% of Rs 18,75,000: Rs 56,250
- Total initial margin: 1,55,000 plus 56,250 = Rs 2,11,250
That is 2,11,250 divided by 18,75,000, or 11.27%: Rs 18.75 lakh of exposure controlled with Rs 2.11 lakh, about 8.9 times gearing.
Feel what that does. If Nifty falls 150 points against a long futures position, the loss is 150 multiplied by 75 = Rs 11,250, debited that evening as mark to market: 5.3% of your posted margin from a 0.6% index move.
Now a short option. Sell one 25,200 call at Rs 120: premium received = 120 multiplied by 75 = Rs 9,000. Margin blocked sits near the futures figure, say Rs 2,05,000, because the downside is open ended. The buyer of that option pays Rs 9,000 and nothing more.
| Position (one lot, lot size 75) | SPAN margin | Exposure margin | Premium flow | Illustrative cash upfront |
|---|---|---|---|---|
| Buy 25,200 call at Rs 120 | Nil | Nil | Rs 9,000 paid | Rs 9,000 |
| Sell 25,200 call at Rs 120 | About Rs 1,49,000 | About Rs 56,000 | Rs 9,000 received | About Rs 2,05,000 |
| Buy one index futures lot | Rs 1,55,000 | Rs 56,250 | None | Rs 2,11,250 |
| Sell 25,200 call, buy 25,400 call at Rs 60 | Sharply reduced by the offset | On the net position | Rs 4,500 net | A small fraction of the naked short |
Every number above illustrates the structure. Real figures come from your broker’s calculator and the clearing corporation’s file for that day. With a multi-leg trade, enter all legs together: one at a time overstates the requirement. Who posts margin and who does not is covered in our guide on buying options versus selling options.
Why did my margin change overnight?
You placed no trade, yet the blocked amount is higher. Usual suspects:
- Volatility went up. A wider price scan range means a bigger worst-case loss and more SPAN.
- The underlying moved. Exposure margin is a percentage of contract value, so a higher price raises it.
- Expiry is close. Short-dated options move more violently, and clearing corporations revise parameters through the day.
- Your hedge expired or was closed. The portfolio benefit disappears and the naked leg is margined in full. This catches people who exit the long leg of a spread first.
- The exchange imposed an ad hoc margin after a sharp move or a corporate event.
The other margins on your ledger
- Mark to market. Futures settle in cash daily against the closing price, so losses are debited the same evening and you must fund the shortfall.
- Delivery margin. Stock F&O contracts in India are physically settled on expiry, so an extra margin ramps up over the last few days towards the full cash market requirement. Index F&O is cash settled and escapes this.
- Additional margin. Imposed on specific scrips when the exchange judges risk to have risen.
- Upfront collection. Brokers must hold the full margin before the order is placed, verified through intraday snapshots.
For a fuller breakdown of what your broker blocks, see our reference on options margin requirements in India.
Margin shortfall: the cost nobody budgets for
If your margin falls short, the exchange levies a penalty on the shortfall, and the rate escalates when it is large or repeats through the month. Your broker may also square off positions without waiting for you. Keep a cushion rather than trading at the limit.
A short risk note. Gearing of nine times means a 5% adverse move can wipe out roughly half your posted margin, and a naked short option has no defined upper bound on loss. Sizing off the margin figure rather than contract value is how people end up far more exposed than they intended. Our notes on the risks of trading on margin and on naked option positions spell out the failure modes.
One expiry trap: STT on the sale of an option is 0.15% of premium, but on an option that is exercised or assigned it is 0.15% of settlement value, paid by the buyer. Letting a slightly in the money option expire instead of squaring it off can cost many times the STT you expected.
Frequently Asked Questions
Do option buyers have to pay SPAN and exposure margin?
No. A buyer’s maximum loss is the premium, paid in full at entry, so there is no initial margin beyond it. That changes only if the long option sits inside a strategy with a short leg, or if you exercise into a physically settled stock contract, where delivery obligations and their margins apply.
Why is my margin on a hedged position so much lower?
Because SPAN is calculated on the portfolio, not each leg. A long leg that gains when the short leg loses reduces the worst-case number. Close the protective leg and the benefit vanishes at once, so exit the short leg first when unwinding a spread.
Is margin the same for Nifty and Bank Nifty contracts?
Not in rupee terms. Both use the same framework, but contract values differ because index levels and lot sizes differ, and the volatility inputs differ too. Bank Nifty has historically been the more volatile, which widens its price scan range. Check both in the calculator.
What happens if I do not have enough margin intraday?
The order is rejected if the shortfall exists before placement. If it appears later because of a loss or a parameter revision, the penalty applies and your broker can square off positions to bring the account into line. A cushion of 20% to 30% above entry margin is usual among active traders.
Can pledged shares be used instead of cash for F&O margin?
Pledged securities can cover part of the requirement after a haircut, but a minimum portion must be in cash or cash equivalents, and mark to market losses settle in cash. So a fully pledged account can still hit a shortfall on a bad day. Ask your broker for its cash component rule.
Key Takeaways
- Initial margin equals SPAN plus exposure margin, both set by the clearing corporation and collected upfront by your broker.
- SPAN is a worst-case loss across your whole portfolio in one underlying, so hedges genuinely reduce it; exposure margin is a flat percentage of contract value.
- At an illustrative Nifty 25,000 with lot size 75, contract value is Rs 18,75,000 and total margin near Rs 2,11,250: about 11.3% of value, roughly 8.9 times gearing.
- Option buyers post only the premium; sellers post full SPAN plus exposure.
- Margins rise on their own when volatility rises, when the underlying rises, near expiry in stock derivatives, and the instant a hedge is removed.
