Someone sells index options in the afternoon before a major policy announcement. The position is comfortably within their balance, and the math works.
Overnight, nothing happens to the price. But the exchange’s risk model, seeing an event coming, raises the margin requirement on that position sharply. By the time they open the app the next morning there is a margin shortfall and a message asking them to add funds. Before they can, the position is squared off.
The market then moves in the direction they expected.
They were right, and it made no difference. That is the part of margin nobody explains, and it is the subject of this post.
Margin is not a payment
When you buy a share for ₹1,000, the ₹1,000 is the price. It is gone, and you own something.
Margin is different. It is a security deposit against an obligation. When you take a futures position or sell an option, you commit to a contract, and the exchange requires collateral in case you cannot meet that obligation.
This has two important consequences. The money is blocked rather than spent, so it is released when the position closes. Also, the amount required is not fixed. It can change while you hold the position, even when your market view has not changed.
The two parts
Your margin requirement has two components and they do different jobs.
SPAN margin is the part calculated using different market scenarios. The exchange considers possible price and volatility changes and estimates the potential loss. This is why a hedged position can require less SPAN margin than an unhedged one.
Exposure margin is an additional safety buffer on top of SPAN margin. It helps cover risks that the model may not fully capture.
Together, these are the margins you need to have available while the position is open.
Why the number moves while you hold
Three things work against you while you hold: the requirement can rise, and your available balance and collateral can fall.
Volatility. If the market gets jumpier, the scenarios in the model get wider, and SPAN goes up. Ahead of a budget, a policy announcement or an election result, margins on the same position can rise materially without a single order being placed.
Mark to market. Futures are settled every day, not when you close. If your position lost money today, that loss is taken from your account today; gains are credited the same way. Options you have sold work slightly differently: the loss is not paid out daily, but it is added to the margin you must hold. Either way, a move against you eats into your balance straight away, and if you are short options moving towards your strike, the requirement rises at the same time.
The value of your collateral. If part of your margin comes from pledged shares, the collateral they provide is their market value minus a haircut. When those shares fall, the collateral falls with them, and in a volatile market the haircut itself can be increased.
When they arrive together. These are not independent risks. A sharp fall tends to bring all of them at once: volatility rises and pushes margins up, a position on the wrong side of the move loses money, and pledged shares lose value. What you need goes up while what you have goes down, often within the same session.
Cash and pledged shares are not the same thing
You do not have to fund margin entirely in cash. You can pledge shares, mutual funds and other eligible holdings and receive collateral margin against them, which is efficient because the holdings keep working for you.
But at least half of the liquid assets a clearing member must deposit has to be in cash or cash equivalents such as fixed deposits, treasury bills or government securities. The rest can be pledged collateral. This is a requirement on the deposits clearing members keep with the exchange, not a rule applied to each client’s account.
There is a practical reason for this rule.
Pledged shares can help meet a margin requirement, but they cannot be used to settle a cash MTM loss. If money has to leave your account, you need the required cash or cash-equivalent resources. A trader with only pledged holdings can therefore still fall short.
What happens when you fall short
A shortfall does not necessarily mean the position is closed immediately. It can happen in stages.
A shortfall is identified. Clearing corporations can take random snapshots during the day rather than checking only at the close. This means the margin requirement must be met during the trading day.
A penalty can follow, based on the size and duration of the shortfall. The applicable framework sets different rates for different shortfall levels and durations.
The broker may then ask you to add funds. If the shortfall is not corrected, the broker may close positions to reduce the requirement. The timing and process depend on the broker's policy.
Which brings us back to the person in the opening. Their position was closed not because they were wrong but because their account could no longer support it at the moment the requirement rose.
Why intraday leverage disappeared
Traders who started before 2021 remember brokers offering twenty or forty times leverage for intraday positions, on the reasoning that a position closed by the end of the day never really existed.
This changed in stages between December 2020 and September 2021. 100% of the prescribed upfront margin requirement became payable, and compliance began to be checked using intraday snapshots rather than only the closing position.
The practical result is that an intraday derivatives position now requires broadly the same margin as an overnight one. Whatever leverage remains comes from the structure of the instrument itself, not from the broker.
The habit that prevents most of this
Do not use all of it.
The balance shown as available is not simply spare money for another position. It is a buffer that can absorb an MTM loss, a rise in volatility, a fall in collateral value, or several of these at once.
Keeping a buffer above the required margin, including some actual cash, can reduce the risk of a forced exit.
One point of confusion worth clearing
The word margin also describes something else entirely. A Margin Trading Facility lets you buy shares in the cash market with money borrowed from your broker, on which you pay interest.
That is borrowing money to own something. The margin discussed in this post is collateral against a derivative obligation. The word is the same, but the arrangement and risks are different.
Common questions
What is SPAN margin?
The part of your margin calculated by testing your position against a range of price and volatility scenarios to estimate the potential loss. A hedged position can require less SPAN margin than an unhedged one.
What is exposure margin?
An additional safety buffer charged on top of SPAN margin, to help cover risks the model may not fully capture.
Why did my account go short of margin without me doing anything?
Usually rising volatility ahead of an event, which raises the requirement, or a loss on the position or a fall in pledged collateral, which reduces what you have. Often more than one at once.
What is MTM in trading?
Mark to market. Futures positions are settled daily, so today's loss is taken from your account today. For options you have sold, the loss is not paid out daily but is added to your margin requirement.
What is a margin call?
A request from your broker to add funds because your account no longer covers the margin requirement. If the shortfall is not corrected, the broker may close positions to bring it back in line.
How much is the margin shortfall penalty?
It depends on the size of the shortfall and how long it lasts. Under the clearing corporation's framework, larger or longer shortfalls attract higher penalties.
Why does at least half my margin have to be in cash?
Because pledged shares can support a margin requirement but cannot pay a loss that has to be settled in money, such as a daily futures loss.
Can my broker square off my position without asking?
Yes. If there is a margin shortfall and it is not corrected, the broker may close positions to reduce the requirement. The timing and process depend on the broker's policy.
Why can I no longer get high intraday leverage?
Because full margin has been payable upfront since September 2021, and margin compliance is checked during the trading day, not only at the close.
The short version
Margin is not the price of a position. It is collateral required while you are exposed. The amount required can rise with volatility, and what you have to meet it can shrink with losses and falling collateral.
Being right about the market direction does not help if your account cannot support the position long enough for the trade to play out.
Risk disclosure
Hem Finlease Private Limited, SEBI Registration No. INZ000167734. Hem Securities Limited, SEBI Reg. No. IN-DP-568-2021, CDSL: 17700/17701.
Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI and membership of recognised stock exchanges do not guarantee the performance of the intermediary or provide any assurance of returns to investors.
All Topics
