The Use Of Margin Calculators In F&o Trading

By Author: Maithili Pawar
Total Articles: 15
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As an investor, if you are willing to increase your risk appetite for investments; you can consider investing in Futures and options. Futures and options trades are done across various investment instruments such as stocks, commodities, currencies, indices, etc. You need a margin account to conduct these investments and you also need to use a tool known as a margin calculator during this trade. Most new investors will wonder, what is future and option trading and why this trading involves the use of the margin calculator. Here’s all you need to know.

Let’s Begin With Understanding What Is F&O Trading?

Trades done through contracts are known as futures and options trades. Under these contracts, buyers and sellers in the investment market are obligated/have the option to to buy and/or sell certain underlying assets on a fixed date at a fixed (predetermined) price.

As per the terms of a futures contract, traders agree to purchase/sell a fixed quantity of an underlying asset on a fixed date in future. Doing this lets the trader escape the risks related to fluctuation in the price of the underlying asset. In case of the options contract, traders have the option, to buy/sell underlying assets at a fixed price at a fixed future date, whereas dealers of futures contracts are obligated to buy/sell whether they make a profit or are facing losses on the expiration date of the futures contract. The option trader on the other hand can exercise their ‘call’ or ‘put’ options under which they can purchase or sell the underlying assets respectively, without being obligated to do so.

As is apparent, trading in futures is a little more risky as compared to trading in options. However, the returns earned through future trades often surpass those earned through options trades.
The Role of Margin Calculators in Futures and Options Trading
If you intend to trade in futures and options, you need to understand what F&O margin calculators are and why they are used in trading.

As an investor trading in F&O you are required to deposit a sum of money in advance, in your trading account provided by your investment broker, before you can begin conducting trades. This account is known as a margin account and the sum deposited is referred to as an initial margin.

Depositing this initial margin is mandatory but it can prove beneficial in that you can conduct high-volume trades as a result of this deposit. Brokerage firms require this deposit to protect themselves against any losses endured by investors owing to price volatility. For example, your brokerage firm will ask you to deposit just 10% or ₹100,000 if you would like to conduct a trade worth ₹1,000,000 in futures and/or options.

Using the Calculator

Typically, you can conduct your F&O trades by using a tool known as a SPAN (Standard Portfolio Analysis of Risk) margin calculator. You can find this tool on your investment broker’s website. All you need to do to calculate the margin is to
• Select the exchange on which you intend to trade
• Select whether you wish to trade in options or futures
• Select the script you would like to trade
• Enter the lot size of your trade
In just a fraction of a second the calculator will calculate the amount of margin you need to deposit before you can begin your trades.

In conclusion, F&O margin calculators are typically essential since margins generally differ on different investment avenues. This is why the SPAN calculator is used by all the leading stock exchanges around the world, including Indian Stock Exchanges.