Margin and leverage
Margin is a deposit, not a price, so a fraction of the money controls the whole position. That multiplies the move in both directions — and because losses are collected daily, it can end a position that would have been right.
Chapter 5 · Intermediate
Everything dangerous about derivatives for an individual runs through this chapter.
Margin is not a price
Buy ₹1,80,000 of shares and you own ₹1,80,000 of shares. Your gains and losses are percentages of what you put in.
Post ₹1,80,000 of margin against an ₹18,00,000 futures position and you own nothing. You have entered an obligation and deposited security against it. Your gains and losses are percentages of ₹18,00,000.
That ratio — position over deposit — is the leverage. Here it is ten times.
What a small move does to a margined position
Index level times lot size. One index lot is often ₹18 lakh or more.
A deposit against your side of the contract, not a payment for anything.
Against you. Indices manage several per cent in a week more often than people expect.
The move that removes your whole deposit
10%
- Leverage
- 10×
- A 2% move costs
- ₹36,000
- Of your deposit
- 20%
At 10× leverage, a move of just 10% against you removes the entire deposit. And losses are debited daily, so the underlying does not need to finish there — it only has to pass through on a day when you cannot fund the call.
What ten times does
| Move in the underlying | Effect on ₹18,00,000 | As a share of ₹1,80,000 margin |
|---|---|---|
| +1% | +₹18,000 | +10% |
| −1% | −₹18,000 | −10% |
| −5% | −₹90,000 | −50% |
| −10% | −₹1,80,000 | −100% |
A 10% move against you removes the entire deposit. Not 10% of it.
And a 10% move is not exotic. Indices manage several per cent in a week regularly, and more than that around events. The question is not whether the underlying can move 10% — it is whether it can do so while you hold the position.
Leverage does not change the odds
The thing people get wrong, stated plainly.
Leverage multiplies the outcome of a view. It does nothing to the probability of the view being right.
So if your edge is zero, leverage converts a slow zero-sum outcome into a fast one. Chapter 1: before costs the segment is close to zero sum, and after costs it is negative. Leverage does not fix that; it accelerates it.
What it does change is how long you survive being wrong, which is the next section and the one that does the damage.
Daily settlement turns paper losses into cash calls
Chapter 2 introduced mark to market. Here is the consequence.
Each evening, losses are debited from your margin. If the balance falls below the required level you get a margin call: add funds, or the position is closed.
So a position needs two things to work out: it must be right, and you must be able to fund every adverse move along the way.
A view that would have been correct at expiry is worth nothing if a move against you in week two exhausted your margin in week two. The contract did what you thought. You were not there.
This is the sharpest difference between derivatives and everything else in this course. Chapter 3 of the fixed income subject had a price fall you could sit through, because nobody made you realise it. Chapter 9 of the equity subject had a 40% fall where holding was a choice. Here, holding is conditional on funding, and the funding is demanded daily.
Why option buying is different, and not safe
An option buyer pays the premium — now collected upfront, from February 2025 under SEBI's measures — and has no further margin obligation. The maximum loss is the premium, known on day one.
That genuinely removes the margin call problem. It does not remove the leverage.
A premium of ₹150 on an index at 24,000 controls exposure far larger than ₹150. The leverage is still there; it is simply bounded at 100% of a small number. Which is why bought options frequently lose everything: a total loss is the normal outcome of an out-of-the-money option, not an exceptional one.
Capped loss and likely loss are different properties, and conflating them is how "my risk is defined" becomes "I lost it all, repeatedly".
Option selling is the other way round
Sold options carry margin, because the obligation is open-ended. Chapter 9 is this.
Note that SEBI's 2024–25 measures included increased tail risk coverage on the day of options expiry — more margin demanded precisely where the risk concentrates. The regulator asking for more collateral on expiry day is a statement about what expiry day does.
The honest summary
Leverage is a magnifier with no opinion. It makes a good decision better and a bad one worse, faster, and it adds a failure mode that has nothing to do with being right: running out of margin before the view plays out.
For anyone without an edge, it converts an unfavourable expected outcome into the same unfavourable outcome arriving sooner and larger. Chapter 10 is what that looks like across ninety-six lakh people.
The point
Margin is a deposit, so a fraction of the money controls the whole position and every move is multiplied. At ten times leverage a 10% adverse move removes the entire deposit, and losses are collected daily — so a position can be closed out before a correct view pays. Leverage multiplies outcomes and changes no probabilities.
Check yourself
4 questions. Every answer is explained afterwards, including the ones you get right — guessing correctly is not the same as knowing. Score 70% or more and the chapter is marked done.
Question 1 of 4
0 of 4 answered. You can submit with questions unanswered — they simply score zero.
Now do it with your own numbers
Take a position worth ₹18,00,000 with ₹1,80,000 of margin. Work out what percentage move in the underlying wipes out the margin entirely. Then ask how often the index moves that much in a week.
Ten times leverage means a 10% move against you equals your whole deposit. Indices move several per cent in a week more often than people expect.