Margins in Futures and Options

What are the margins? 

In futures and options trading, you have to pay two types of margins Initial Margin and MTM (Mark to Market) Margin.

Initial margin: Initial margin is the upfront margin that you have to pay before you can take position in any futures contract. The initial margin consists of different components such as SPAN margin, exposure margin, premium margin and assignment margin. Initial margin generally varies daily depending upon the value of the underlying security, volatility and time to expiration. At present, the initial margins range from 10% to 35% of the notional contract value depending upon the underlying. For example, the initial margin on MINIFTY futures is around 11000, on NIFTY, it is around 27500 and on Reliance Industry futures, it is around 67800. Most of the brokers follow the margin system of NSE but you should check out with your broker.
In case of options, if you are buying an option, you don’t have to pay any margin, as you have to pay the entire premium amount upfront. However, if you are short (option writing), you have to pay initial margin as per NSE SPAN system. Please note that option writing (shorting call or put options) involves substantial risk and it is not the cup of tea for the beginners.

MTM: Mark to Market is the system by which you will receive/pay the notional gain/loss on the day-to-day basis. For instance, you buy one lot of NIFTY futures at 4975 and allow it to carry forward. Now, if the closing price of NIFTY is 4995, your notional profit = 20 x 50 (NIFTY lot size) = 1000. In this case, your broker will credit your running ledger account with Rs.1000. Please note that the reference is always the closing price of NIFTY on the previous day. Let’s see the MTM working for five days.