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Margins in F&O Trading Explained: Understanding SPAN, VaR, ELM, and Exposure Margins

Post Date : October 27, 2025

In India’s Futures and Options (F&O) segment, margins are collected upfront to safeguard both traders and the market from potential losses. These margins ensure that participants always have enough capital to cover risks arising from price fluctuations.

In practical terms, the Initial Margin is made up of multiple components SPAN (Portfolio Risk Margin), Value at Risk (VaR), Extreme Loss Margin (ELM), and Exposure or Event-Day Add-ons specified by the exchange. Understanding how these components work together helps traders stay compliant while optimizing their capital usage.

Understanding SPAN, VaR, and ELM

1. SPAN (Portfolio Risk Margin)

SPAN, short for Standard Portfolio Analysis of Risk, is the exchange’s risk engine that simulates various market scenarios to estimate the worst possible one-day loss for a trader’s combined futures and options portfolio.
Since risk is calculated at the portfolio level, hedged or offsetting positions (like spreads) often reduce the total margin requirement — making SPAN a risk-based and capital-efficient system.

2. VaR (Value at Risk)

VaR measures the expected daily price movement risk based on market volatility. It represents the likely loss that could occur under normal trading conditions.

3. ELM (Extreme Loss Margin)

ELM acts as an additional safety buffer to cover rare and extreme market events that might not be captured by VaR. It helps maintain market stability during sudden shocks or black-swan events.

Note: Brokers are required to collect these upfront margins before trade execution. Any shortfall can attract penalties or lead to a reduction in positions.

What is Exposure or Add-on Margin?

The Exposure Margin (also called Add-on Margin) is an extra cushion collected over and above SPAN, VaR, and ELM. It is meant to protect the system from residual, tail-end, or model risks — particularly during periods of high volatility, corporate actions, or expiry sessions.

These rates are determined by the exchange and can change based on market conditions.
Avoid assuming fixed rates like 2% or 3%  always check your broker’s live margin calculator or the latest exchange circulars for updated values.

Initial Margin = Total Upfront Requirement

The total margin blocked before entering a trade includes:

• SPAN (Portfolio Risk Margin)
• VaR (Value at Risk)
• ELM (Extreme Loss Margin)
• Exchange-mandated Exposure/Add-on Margins

This margin is calculated on a net portfolio basis, taking into account all open positions.
Hedged or defined-risk strategies typically require lower margins, as the maximum loss is capped, unlike naked positions where the potential loss is unlimited.

Why Margins Matter?

• Risk Management: Margins ensure traders have adequate funds to absorb market volatility.
• Market Stability: Proper margining helps prevent excessive leverage and disorderly price movements.
• Regulatory Compliance: Margin shortfalls can lead to penalties or forced position closures by the broker or exchange.

Recent Updates

• Dynamic Buffers: Exchanges may impose higher add-ons during volatile periods, around major events, or near expiry. Spread benefits may also be reduced in such times.
• Premium and Offsets: Option buyers pay premiums upfront, while sellers must maintain full margins. Hedged strategies remain more margin-efficient, but expiry-day treatment may vary by product.
• Live Monitoring: Since margins change dynamically, traders should always verify current requirements through their broker’s calculator and refer to the latest circulars before taking positions.

Key Takeaways

• “SPAN” is often used as a general term for portfolio risk margin, but Initial Margin also includes VaR, ELM, and exposure add-ons.
• Exposure margins are not fixed; they vary across instruments and market conditions.
• Hedged positions significantly reduce margin requirements compared to naked positions.
• Always maintain sufficient balance to avoid penalties or auto square-offs.

Remember

• Use a live margin calculator before placing any order to estimate the exact requirement.
• Recheck margin requirements on expiry days or ahead of key events for possible changes.
• Stay updated with exchange and broker circulars, as margin norms are revised periodically.