InvestorQ : Why does the broker demand margins when I trade futures & options?
natasha Samani made post

Why does the broker demand margins when I trade futures & options?

Answer
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shrinidhi Rajan answered.
2 years ago


When you trade in futures there are different margins that you will have to pay. When you initiate the position, you have to pay Initial Margins. The initial margins have two components viz. VAR margins and ELM margins. The VAR or the Value at Risk margin is based on the extreme loss scenario for a single day. The ELM or Extreme loss Margin is an exposure margin which used to be optional before. But now SEBI has made it mandatory to collect ELM too. In addition, if the price movement is against you then there is MTM or Mark to Market margin that is charged to your F&O position. When you buy options, you only pay premium margins and that is all. No additional margins are required. Since futures and options are margin products, you have to pay an initial margin to cover the risk of price movement against you. Long futures, short futures and short options will attract initial margins and mark-to-market (MTM) margins based on price movement. However, long options will only attract premium margin since your maximum loss is limited to the premium paid. Collection of margins is basically a risk management measure so that your position does not create any risk in the market system overall.