How will the change in F&O margin policy affect my positions from January 21, 2019?
SPAN +Exposure margin will go up by a maximum of 41% of the current margins as volatility for 2 days is considered instead of 1. Margins for Nifty and Banknifty futures will go up by roughly Rs 10,000 and Rs 7,000 respectively.
Below is a more detailed explanation of how the change will affect SPAN+Exposure margins:
SPAN margins are charged to cover for the worst possible movement in the contract you are trading for a single day. The exchange has now revised this to cover for possible volatility over 2 days. SPAN margins are charged by calculating the Price Scan Range of the index or the stock.
Price Scan Range (PSR) is the worst possible movement in a scrip in a day. PSR is calculated using the daily volatility of the scrip. It is 3 sigma of the daily volatility for index contracts and 3.5 sigma for stocks. The exchange also prescribes minimum PSR of 5% of the contract value for index and 7.5% for stocks in case the 3(and 3.5) standard deviation is lower than the above-mentioned minimum. This will now be multiplied by 1.41 to cover for 2 days’ price movement.
Exposure margins are charged over and above SPAN margins. This is 3% of the contract value for index and 5%(or 1.5 sigma, whichever is higher) for stock F&O. This will also be increased to 4.24% for index and 7.07% (or 1.5 sigma, whichever is higher) for stock F&O.
Short Option Minimum (SOM) is a minimum margin for all strikes of option short contracts that fall beyond the Price Scan Range. For instance, Nifty has a PSR of 762 points (covering a 7% movement). This effectively means that holding a 11700 CE or 10000 PE is risk-free, however, SOM of 3% is charged for such contracts. This will now go up to 5% of the contract value. There is no increase in SOM for stock options.
If you have any queries related to this, you can ask them in this TradingQ&A thread.
Calculation of the revised margins is illustrated in this spreadsheet.