Initial Margin
The minimum margin deposit required to open a new futures or short options position, calculated as the sum of SPAN margin and exposure margin, representing the exchange's estimate of the maximum one-day loss the position could incur under adverse market conditions.
When a trader initiates a new futures or short options position on NSE, the clearing corporation immediately blocks a specified amount from the trader's collateral as initial margin. This serves as a performance bond — an assurance that the trader can meet at least one day's worth of adverse price movement before any variation margin or top-up is called.
NSE calculated initial margin using the SPAN (Standard Portfolio Analysis of Risk) system. SPAN evaluated the portfolio of futures and options positions against a grid of hypothetical scenarios covering different price moves (scan range) and volatility changes. The worst-case loss across all scenarios became the SPAN margin requirement. To this, the exchange added the exposure margin — a percentage of notional value to cover risks outside SPAN's model scope. The sum constituted the total initial margin.
Initial margin requirements were dynamic. As underlying prices moved or implied volatility changed, the SPAN calculation updated the margin requirement for existing positions. If a stock became more volatile (perhaps due to results or corporate developments), its SPAN margin would rise, requiring additional collateral even without any change in position size. Conversely, if volatility subsided, the margin requirement could decline, releasing collateral.
Margin collection by brokers occurred at order execution. A broker's risk management system checked the available free collateral in the client's account before permitting an order. If insufficient collateral was available, the order was rejected. In practice, most brokers required a slight buffer above the theoretical initial margin to allow for intraday price fluctuations before a formal margin call.
For option buyers, there was no initial margin requirement in the traditional sense — the buyer paid the premium in full at the time of purchase, and that premium was the maximum loss. Initial margin requirements in F&O therefore primarily applied to futures traders and option writers, aligning the economics of risk with the capital requirements.