Devolvement margin
Also written Devolvement Margin for Options on Futures
A margin charged equally on buyers and sellers of Options on Futures over the last three days before expiry, so that ITM positions about to become futures already carry futures-level margin.
In plain language
Before expiry, an option on futures is lightly margined for one side and not at all for the other: buyers pay no margin, sellers pay the Short Option Minimum Margin (SOMM).
After devolvement both sides hold futures, and futures demand initial margin, ELM, and whatever additional or concentration margins are in force — from buyer and seller alike.
The devolvement margin bridges that gap. It is collected in the last three days before the option expires, from both sides, so the jump to futures margins does not arrive as a shortfall on the morning after devolvement.
How it works
Who pays. Buyers and sellers of the options that are about to devolve — charged equally to players on both sides.
When. Normally on E-2, E-1 and E (expiry day) of the Options on Futures.
How much each day. One-third of the estimated requirement on each of the three days, plus any backlog from earlier days if the estimate has since been revised for volatility or price moves.
Why. ITM options about to devolve carry the risk of margin shortfall, because their holders must comply with futures margin requirements on devolvement. The logic mirrors the delivery period margin that Options on Goods pay in their last days.
What it is not. Options on Futures do not pay tender/delivery period margin — they devolve before the futures enter the staggered delivery period. Options on Goods do not pay devolvement margin — they never devolve into futures.
| Options on Futures | Options on Goods | |
|---|---|---|
| Devolvement margin | Yes | No |
| Delivery period margin | No | Yes, on buyers and sellers of ITM/CTM strikes |
The contract specifications carry enabling clauses for both, so exchanges can cover the margin gap on devolvement to futures or the payment gap on delivery.
A worked example
The workbook's example, worked through. On E-2 the clearing corporation estimates the devolvement margin for a position at Rs 25,000 per day for each of the three days.
On E-1 volatility has risen and the requirement is recalculated to Rs 26,000 per day.
| Day | Daily amount | Backlog | Collected | Cumulative |
|---|---|---|---|---|
| E-2 | Rs 25,000 | — | Rs 25,000 | Rs 25,000 |
| E-1 | Rs 26,000 | Rs 1,000 (shortfall on E-2) | Rs 27,000 | Rs 52,000 |
| E | Rs 26,000 | — | Rs 26,000 | Rs 78,000 |
Check: 3 x 26,000 = Rs 78,000
By the end of expiry day the position has posted the full recalculated requirement. When the option devolves into futures that evening, the futures margin is already there.
The buyer's view. Until E-3 this buyer had paid only the premium. From E-2 onward he is posting margin on an option he already owns outright — because, once exercised, he will not own an option any more; he will owe on a futures contract.
Why NISM asks about it
Chapter 7, section 7.11.1, lists devolvement margin as the extra margin that Options on Futures attract; section 7.11.6 (Devolvement Margin for Option on Futures) gives the mechanism and the Rs 25,000 / Rs 26,000 / Rs 27,000 example; section 7.12.2 repeats it among the daily Options on Futures obligations. Chapter 6, section 6.4, notes the enabling clause in contract specifications. Chapter 4's sample questions use "Option on goods do not have devolvement margin" as a distractor. Expect the three-day schedule and the backlog calculation.
Common exam traps
- Charged on both buyers and sellers, equally — unlike SOMM, which only sellers pay.
- E-2, E-1 and E — the last three days, not the last five.
- Backlog is added on the day of recalculation. Rs 26,000 + Rs 1,000 = Rs 27,000 on E-1.
- Options on Goods have no devolvement margin; they pay delivery period margin instead.
- Options on Futures have no delivery period margin; they devolve before the futures' delivery period.
- Cross-reference error in the workbook. Section 7.12.2 says devolvement margins are "mentioned above in section 7.10"; the mechanism is actually in section 7.11.6.
Check yourself
1.Option on Goods does NOT attract which of the following margins?
- a)Initial Margin
- b)Devolvement Margin
- c)Delivery Margin
- d)SOMM
Show the answer
Answer: (b) Devolvement Margin
(This is a sample question from the NISM workbook.)
"OPTION ON FUTURES will attract DEVOLVEMENT MARGIN (BUT DOES NOT HAVE TENDER PERIOD/DELIVERY PERIOD MARGIN). OPTION ON GOODS WILL HAVE ALL THE ABOVE MARGINS OF FUTURES APPLICABLE AT ALL THE TIME ON OPTION SELLERS, INCLUDING TENDER PERIOD/DELIVERY PERIOD MARGIN."
The two products have exactly opposite exposures here, which is what makes this pair so examinable:
Options on FUTURES Options on GOODS ⚠️ Devolvement margin ⚠️ YES ⚠️ NO ⚠️ Delivery / tender period margin ⚠️ NO ⚠️ YES The logic behind each: an Option on Futures devolves into a futures position, and "buyers in Options on Futures are NOT CHARGED ANY MARGIN while sellers are charged SOMM" — whereas in futures both sides pay several margins. So "ITM options about to devolve carry THE RISK OF MARGIN SHORTFALL", and devolvement margin pre-funds that gap over E-2, E-1 and E.
An Option on Goods devolves straight into delivery and payment. There is no futures position to fund — but there is a real delivery obligation, so delivery period margin applies to both buyers and sellers in the last 3-5 days.
Initial margin and SOMM apply to both products, so options (a) and (d) are never the answer here.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Extreme Loss MarginA flat 3.5 per cent margin collected on cash-market positions to cover losses falling outside what the VaR margin is designed to capture.
- Initial marginThe deposit both the buyer and the seller of a futures contract must place before the position is accepted, sized to cover a 99% worst-case one-day loss on that position.
- Options on FuturesA European commodity option whose underlying is a futures contract, so exercise devolves into a futures position opened at the strike price rather than into delivery of the goods.
- Short Option Minimum MarginThe SPAN-computed margin charged to the writer of a commodity option, floored by SEBI-prescribed minimum volatility scan ranges so that a cheap option cannot be written on a trivial margin.
- Tender period marginAn extra margin charged at client level on all open positions once a contract enters its tender or delivery period — the higher of 20% of contract value, or 3% plus a five-day 99% VaR of spot prices.
- Contrary instructionAn instruction from the holder of an in-the-money option telling the exchange **not** to exercise it — the only way to stop an ITM contract being exercised automatically at expiry.
- Additional marginAn extra exchange margin levied on both the buy and sell side of a commodity contract to cool an overheated market; separately, a margin a broker may impose on risky clients or trades.
- Concentration marginAn extra margin levied only on the clients whose buy- or sell-side open interest is concentrated relative to total open interest in a commodity or contract, rather than on the whole market.