Margin Calculator
Margin Calculator​
A margin calculator is a vital tool in futures trading, allowing traders to determine the margin required to open a position. At AlgoTest, we make use of margin calculators to help traders manage their capital effectively, especially when using our Strategy Builder and Simulator for futures and options trades.
What is a Margin Calculator?​
A margin calculator calculates the initial margin needed for a trade based on the SPAN (Standard Portfolio Analysis of Risk) and exposure margins. This gives traders the ability to understand how much capital they need to allocate for futures contracts, which can differ depending on market volatility and the underlying asset.
Example: If you’re planning to trade TCS futures with a contract value of ₹3,00,000, a margin calculator will determine the margin required—say ₹40,000—based on the SPAN and exposure margins applicable.
How to Use a Margin Calculator​
Let’s take an example where you want to buy a futures contract for AXIS BANK. Using a margin calculator involves the following steps:
- Select the Contract: Choose the exchange (NSE), the product (futures), and the stock (AXIS BANK) that you wish to trade.
- Lot Size and Expiry Date: The margin calculator will automatically populate the lot size and the expiry date for the selected contract.
- Calculate Margins: Based on market conditions, the calculator will display the SPAN margin, exposure margin, and total initial margin required to execute the trade. For instance, the SPAN margin for AXIS BANK futures might be â‚ą20,000, and the exposure margin â‚ą15,000, resulting in a total initial margin of â‚ą35,000.
The Role of SPAN and Exposure Margins​
- SPAN Margin: This is the minimum margin set by the exchange to manage risk.
- Exposure Margin: This acts as a buffer to account for sudden market volatility, reducing counterparty risk.
Here’s a simple chart that shows how margin breaks down for a futures contract:
| Futures Contract | SPAN Margin | Exposure Margin | Total Margin |
|---|---|---|---|
| AXIS BANK | â‚ą20,000 | â‚ą15,000 | â‚ą35,000 |
| TCS | â‚ą25,000 | â‚ą17,000 | â‚ą42,000 |
Expiry Dates and Rolling Over Contracts​
Futures contracts have an expiry date, and it’s important to know how long your position will remain open. If you believe the market direction will continue after your contract’s expiry, you can choose to “roll over” to a further contract.
Example: If you hold a January contract that expires on the 29th and the market outlook is still favorable, you can roll over into a February contract, extending your position. A margin calculator will adjust for the new margin requirements based on the new contract.
Benefits for AlgoTest Traders​
AlgoTest’s Strategy Builder incorporates margin calculators to help traders determine margin requirements for their strategies. With our Simulator, you can backtest strategies and see how margin requirements fluctuate based on historical data, helping you optimize your capital allocation.
Understanding how margin works allows you to trade confidently, ensuring that you have sufficient funds to maintain your positions, even in volatile market conditions.
In this section, we dive deeper into how margins are calculated and the role of Risk Management Systems (RMS). AlgoTest users, when creating strategies in our Strategy Builder, can use margin calculators to understand how much margin is required based on different trading scenarios.
Understanding Margins and RMS​
The Risk Management System (RMS) at a brokerage oversees the margin requirements. When you place a trade, the RMS evaluates your order based on several key factors, including the contract type, trade size, and price, to determine whether you have enough margin to cover potential losses.
However, there’s often more to consider than just the contract value. You might want to specify additional details like the trade duration or set a stop-loss to manage your risk. The more information you provide about your trade, the better the RMS system can assess the risk and adjust your margin requirement accordingly.
Example: Let’s say you’re trading BPCL futures. If you hold the position overnight, you’re exposed to risks beyond just daily price fluctuations. For instance, if international crude oil prices surge overnight, BPCL stock could drop when the market opens. This additional risk, known as overnight risk, is a critical factor in how margins are calculated. The longer you hold a trade, the higher the potential risk, and consequently, the higher the margin required.
In contrast, if you plan to trade intraday—meaning you’ll close the position before the end of the trading day—the risk is limited to just that day’s market volatility. In such cases, the margin required would be lower than for an overnight position.
Types of Product Orders​
Understanding how different product types affect margin requirements is crucial. Here are a few product types commonly used in futures trading:
- NRML (Normal): This product type is used when you intend to hold your position overnight or over several days. NRML requires the full SPAN + Exposure margin because the RMS system has no information about your exit plan or stop-loss.
- MIS (Margin Intraday Square-Off): For intraday trading, where all positions are closed within the day, the margin requirement is lower than NRML since the risk exposure is limited to one day.
- CO (Cover Order): This is an intraday product where you specify a stop-loss, giving the RMS system more clarity about the risk. Since the maximum loss is predefined, the margin requirement is even lower than MIS.
- BO (Bracket Order): Similar to CO, but with the added feature of setting both a stop-loss and a target price. This helps traders manage risk and reward simultaneously, and like CO, it reduces the margin requirement.
Practical Use for AlgoTest Traders​
AlgoTest’s Margin Calculator lets traders test different scenarios based on their trade plans. If you’re unsure about how much margin is required for your strategy, our Simulator allows you to backtest trades and adjust your strategies accordingly. For instance, if you know you’ll be using a cover order, you can input the trade details and the system will calculate the margin, factoring in the specified stop-loss.
Conclusion​
By understanding how margins are calculated and the role of RMS, traders can better manage their capital and risk exposure. AlgoTest’s tools make this easier by allowing users to simulate different scenarios and optimise their trading strategies based on margin requirements.