Skill Sheet: What You Will Learn Here
- Understand basics of margin
- Know how to calculate margin
We have learnt so far that not only do futures allow you to speculate on an asset’s direction on both sides, up and down, but they also offer leverage benefits.
What does leverage mean? In simple terms, it means that I can pay Rs 100 to gain exposure to an asset worth more than Rs 100. It could be Rs 200, Rs 500 or even more.
Assuming a trader’s leverage is 5 times (or exposure to a position worth Rs 500 even if the amount put up is Rs 100), the trader stands to make a profit of 5X more than when the leverage did not exist.
Basically, this means that if the stock worth Rs 100 went up to Rs 110, the trader would make a profit of Rs 50, not Rs 10.
Of course, as you know, leverage is a double-edged sword. This also means that a Rs 10 fall would also lead to a Rs 50 loss for the trader.
The leverage benefit is called margin in stock broking terms.
Below are key things to know about margin.
- Exchanges ask you to put down a certain margin while taking exposure to a particular futures contract
- This margin ensures that you have sufficient capital to fund any losses that may arrive from the position
- If you incur a loss on the position that may threaten to wipe out the margin, you will get a ‘margin call’ from the stock broker asking you to top up your margin.
Now let’s look at this through an example. Imagine you want to buy Reliance Industries Futures with delivery on the nearest option expiry. The minimum quantity (lot size) is 250 shares. Meaning if the futures contract is priced at Rs 2,450, the exposure you get is Rs 6.12 lakh.
However, when you pull up the order form, you will see that the margin you have to put down is Rs 1.33 lakh. This means that your margin is about 4.6 times (6.12/1.33).
You can also check how much margin you will have to pay for any futures contract by hopping over to the Espresso Margin Calculator page.
After going to the Margin Calculator page:
- Select the segment for which you want to calculate the margin from the dropdown
- Enter the contract type, name of the scrip, its lot size and the current price
- Hit calculate now