Short Option Minimum Margin
Also written SOMM · Short Option Minimum Margin (SOMM)
The 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.
In plain language
An option buyer pays a premium and is done. His worst case is that the premium is lost, and you cannot lose more than you have already handed over — so he is charged no margin at all.
The writer is in the opposite position. He has collected a small premium and taken on an obligation that, for a short call, has no ceiling. He is the one the clearing corporation has to worry about, and Short Option Minimum Margin is how it worries.
The word that carries the weight is minimum. SPAN will produce a number from its scenarios, but SEBI puts a floor under the volatility input so that a quiet market cannot talk the margin down to something that will not survive the first bad morning.
How it works
SOMM is computed through SPAN — Standard Portfolio Analysis of Risk, developed by the Chicago Mercantile Exchange Group and licensed to exchanges worldwide. SPAN is scenario-based: it takes the portfolio and asks what it would be worth if the underlying price and the underlying volatility each moved by set amounts, running a total of 16 risk scenarios and taking the worst outcome as the margin.
SPAN has two headline parameters: the initial margin rate, called the scanning range, and the percentage volatility movement. It is the second that SEBI floors, through the minimum Volatility Scan Range, effective from 1 April 2021:
| Annualised realised volatility | Bucket | Agri minimum VSR | Non-agri minimum VSR |
|---|---|---|---|
| 0% to 15% | Low | 5% | 4% |
| 15% to 20% | Medium | 6% | 5% |
| 20% and above | High | 7% | 6% |
The option writer carries SOMM alongside everything else. For index options the clearing corporation imposes SOMM, initial margin, concentration margin, additional ad-hoc margin, ELM and pre-expiry margins — and the workbook is explicit that all of these apply to the seller. Buyers pay the premium on T+1 and nothing more.
On an Option on Futures the writer additionally faces devolvement margin over the last three days; on an Option on Goods, delivery period margin.
A worked example
A trader writes one gold Rs 50,000 call — an Option on Futures, lot 1 kilogram — and collects a premium of Rs 1,200 per 10 grams.
Premium received = 1,200 x 100 units of 10 g = Rs 1,20,000, credited on T+1
Notional value of the underlying lot = Rs 50,00,000
Rs 1,20,000 in hand looks comfortable. It is not the measure of his risk.
Gold is non-agricultural. Suppose its annualised realised volatility is running at 22% — the high bucket — so the minimum Volatility Scan Range SPAN must use is 6%, not whatever lower figure a quiet fortnight might justify.
SPAN now revalues the short call across its 16 scenarios, moving the gold futures price across the scanning range and volatility across at least that 6% band, and takes the worst. If the worst scenario values the position at a loss of, say, Rs 3,15,000, that is the margin blocked — more than two and a half times the premium he collected.
And if he is still short into the option's last three days, devolvement margin is layered on top, charged equally to him and to the buyer. The buyer, throughout, has posted nothing.
Why NISM asks about it
Chapter 7 (Clearing, Settlement and Risk Management), sections 7.11.1 and 7.12.2, with the index options margin list in Chapter 2 section 2.6. Expect "which margin is levied on the option seller" (SOMM), "how many scenarios does SPAN consider" (16), and the VSR matrix — the 5/6/7 and 4/5/6 figures are asked directly.
Common exam traps
- SOMM is charged to the writer only. Option buyers are charged no margin whatsoever — the workbook says so twice.
- The VSR numbers differ by commodity type. Agri 5/6/7, non-agri 4/5/6. Higher floors for agri, because agricultural spot markets are less controlled.
- SPAN runs 16 scenarios, not 2 or 10. This is a favourite one-line question.
- SOMM is a floor mechanism, not a separate margin bucket. It is the SPAN result computed with SEBI's minimum volatility input.
- Option on Goods has no devolvement margin but does have delivery period margin; Option on Futures is the reverse. The sample question in Chapter 7 tests exactly this.
- Annualised volatility of exactly 20% falls in the high bucket, not the medium one.
Check yourself
1.Under SEBI's circular of 24 March 2022 on commodity index options, what happens to contracts on the expiry date?
- a)All ITM contracts are exercised automatically unless the buyer has given a contrary instruction; all OTM contracts expire worthless
- b)All ITM contracts expire worthless unless the buyer submits an exercise instruction
- c)All ITM and ATM contracts are exercised automatically and result in delivery of the constituent commodities
- d)The buyer must exercise every contract manually, as these are American-style options
Show the answer
Answer: (a) All ITM contracts are exercised automatically unless the buyer has given a contrary instruction; all OTM contracts expire worthless
On expiry date, all ITM contracts will get exercised automatically, unless the buyer of the option has given a "contrary instruction". All OTM contracts shall expire worthless.
Option (d) reverses the style: these are European-style options, with a minimum of three strikes available for trading — exercisable only on expiry.
Option (c) fails on settlement: index options will be cash-settled on their expiry, with the final settlement price being the index price arrived at from the volume weighted average price of the constituents between 4:00 pm and 5:00 pm on the expiry day. There is no delivery of commodities.
Two further design rules from the same circular: exchanges may introduce index options of up to 12 months expiry, and the expiry date of options shall not coincide with the roll-over of index constituents — because a roll-over is precisely the moment when the index is in transition between contracts.
Also worth carrying into the exam: because index options are cash-settled, there will not be any rolling period or delivery period margin, and all margins — SOMM, initial, concentration, additional adhoc, ELM, pre-expiry — are applicable to the seller, with initial margin applied at the level of the individual client's portfolio.
2.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.
3.What is the minimum Volatility Scan Range prescribed by SEBI for a non-agricultural commodity showing high annualized realized volatility?
- a)4 per cent
- b)5 per cent
- c)6 per cent
- d)7 per cent
Show the answer
Answer: (c) 6 per cent
"The minimum Volatility Scan Range prescribed by SEBI for AGRICULTURAL commodity derivatives is 5%, 6%, 7%, and for NON-AGRI commodity derivatives it is 4%, 5%, 6% respectively for commodities showing LOW, MEDIUM AND HIGH annualized realized volatility."
Annualized volatility Category ⚠️ Agri VSR ⚠️ Non-agri VSR 0 – 15% LOW 5% 4% 15% – 20% MEDIUM 6% 5% ⚠️ 20% and above HIGH 7% ⚠️ 6% Option (d) 7 per cent is the agri figure for the same volatility band — and mixing the two rows is exactly what the question tests. Agri is always one percentage point higher than non-agri at every level, which is the simplest way to hold the matrix in memory.
What the VSR is for: "SEBI's minimum level of volatility scan range are used for SOMM (SHORT OPTION MINIMUM MARGIN) in options", effective 1 April 2021.
And where it sits within SPAN: "SPAN (STANDARD PORTFOLIO ANALYSIS OF RISK) is a SCENARIO-BASED RISK CALCULATION METHODOLOGY... ORIGINALLY DEVELOPED BY THE CHICAGO MERCANTILE EXCHANGE GROUP. Its parameters include THE INITIAL MARGIN RATE (KNOWN AS SCANNING RANGE) AND THE PERCENTAGE VOLATILITY MOVEMENT." It "considers A TOTAL OF 16 RISK SCENARIOS when estimating THE MAXIMUM LOSS THAT A POSITION MIGHT INCUR FROM ONE TRADING DAY TO THE NEXT", with the scenario set updated daily.
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.
- SPANThe scenario-based system clearing corporations use to compute initial margin — it revalues a client's whole derivatives portfolio under sixteen what-if scenarios and charges the worst loss.
- Option premiumThe price an option buyer pays the seller for the right the contract carries — non-refundable, and made up of intrinsic value plus time value.
- 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.
- Volatility Scan RangeThe percentage volatility movement SPAN applies when scanning a portfolio for its worst-case loss, floored by SEBI at levels that depend on the commodity type and its annualised volatility.