Trading mechanics
In this chapter: Order types, margins, mark-to-market · Settlement cycles, physical settlement
Derivatives are traded through brokers on exchanges. Order types: market, limit, stop-loss, stop-loss-market, bracket. Margins are required for both buy and sell positions in futures, and for sell (write) positions in options. Long option positions require only the premium — no additional margin. Mark-to-market (MTM) settles daily P&L in cash to the broker's margin account.
Initial margin = SPAN margin (Standard Portfolio Analysis of Risk) + Exposure margin. SPAN is computed by the clearing corporation based on worst-case scenarios across price and volatility shifts. Exposure margin is an additional 3-5% buffer for systemic risk. Total margin can be 10-25% of contract value depending on volatility — leverage of 4-10×. MTM is collected daily; if margin falls below the maintenance level, a margin call is issued and the broker can square off positions. Stock derivatives now physically settle on expiry — long ITM positions take delivery; short ITM deliver shares.
A 2020-21 SEBI change: peak margin reporting and intraday margin requirements were tightened. Brokers now require full margin upfront for derivatives trades, not the post-trade peak. This reduced retail leverage materially. Another nuance: STT (Securities Transaction Tax) on options is computed on premium for buyers, on premium × strike for sellers — the asymmetry creates real cost differences between buying and selling options.