What is spread benefit and span benefit in F&O trading?

#1

Do explain with a futures spread position and a future and option hedged position.

#2

Hello,

A few points to remember before we get started:

  1. SPAN stands for Standardised Portfolio Analysis of Risk. SPAN is calculated on your entire portfolio of positions.
  2. While entering a position, you’ll require to have the entire margin for this position. The system will not be aware of what positions you already have.
  3. Once the position is taken, SPAN is calculated on your portfolio of positions and if this position results in a SPAN benefit and/or spread benefit in your portfolio, then this benefit amount is released back into your trading account.
  4. You receive a spread benefit as well as span benefit when you take a Futures spread position.
  5. You only receive a span benefit when you take a future and option hedged position.

Let’s take 2 examples, one for futures spread and another for a future and options hedge.

Example 1. Futures spread position - spread and margin benefit

You require a margin of about 57k (36k span margin and 21k exposure margin) to buy/sell one lot of Nifty futures as shown in the image below.

Let’s take a spread position where you buy 1 lot of Nifty July futures and sell 1 lot of Nifty Aug futures.

To trade 2 lots of Nifty futures, you require 57k + 57k = 114k (72k span and 42k exposure) but since you are taking a spread position, span margin required is only 7k (you receive a span benefit of 65k as calculated by the span system).
You also receive a spread benefit(also calculated by the span system) of 35k.

Your total margin benefit = span benefit + spread benefit = 65k + 35 = 1 lakh. Only a margin of 14k is required to take this position. This is shown in the image below.

Please note, you require the entire margin of 114k in your account while taking this spread position. Once the positions have entered your portfolio, the margin benefit of 1lakh is credited back into your trading account.

Example 2: Future and option hedge position

You require 57k(36k span and 21k exposure) to buy 1 lot of Nifty July futures and you require 51k(30k span and 21k exposure) to short 1 lot of Nifty July 9500 Call.
The total Span required for this position is 66k but since it is a hedged position, you only require a Span margin of 43k(you receive a Span benefit of 23k as shown in the image below.)

Please note, you require to have the entire margin of 108k while taking these positions. Once the position has entered your portfolio, you receive a span benefit of 23k and this is released back into your account.
Your total margin benefit = span benefit = 23k.

Note: Real-time span is updated 5 times a day based on volatility. The span margin calculated in the margin calculator is based on the previous day closing span values.

1 Like
Can I take F&O hedged positions without the margin benefit amount in my account?