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Start Learning → Browse All Articles →SPAN and exposure margin, what option sellers actually need, peak margin rules, pledging shares, and what triggers a margin call.
Margin is the capital the exchange requires you to post against a position’s potential loss. For F&O it is calculated by risk model, not as a flat percentage, which is why two positions of similar notional value can require very different amounts. Understanding the components tells you why option selling needs so much more capital than option buying.
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Total initial margin is SPAN plus exposure. SPAN is computed by a risk model that revalues your whole portfolio across a range of price and volatility scenarios, then charges the worst-case loss. Exposure margin is an additional buffer on top, charged as a percentage of contract value.
Because SPAN is portfolio-based, hedged positions cost dramatically less than naked ones. A short call offset by a long call further out can require a fraction of the margin of the short leg alone — the model recognises the capped loss.
An option buyer’s maximum loss is the premium, paid upfront. There is nothing further to secure, so no margin is required. An option seller’s loss is theoretically unbounded, so the exchange demands margin sized to a severe adverse move — commonly a multiple of the premium collected.
This asymmetry is the real barrier to option selling. The strategy is not complicated; the capital requirement is.
Peak margin rules require brokers to collect the full applicable margin based on snapshots taken through the day, rather than end-of-day. The practical effect is that intraday leverage was substantially reduced — positions must be funded when they are open, not merely when they close.
Plan position size against the margin you must hold throughout the session, not the margin at the moment of entry.
Shares can be pledged to generate collateral margin, subject to a haircut, and exchanges typically require a portion of margin in cash. Mark-to-market settlement is separate from initial margin: futures positions are settled daily against the closing price, and losses are debited in cash.
A margin call means available margin has fallen below requirement. Unmet calls lead to position squaring by the broker, usually at the least convenient moment.
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Because the potential loss is unbounded. Margin is sized to cover a severe adverse move, so it is typically several times the premium received.
Substantially. SPAN evaluates the portfolio as a whole, so a defined-risk spread requires far less margin than the short leg would on its own.
Initial margin is posted upfront to secure the position. MTM is the daily cash settlement of gains and losses against the closing price, debited or credited separately.
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