Why does the margin requirement change or suddenly increase when a contract comes near to expiry?

The margin requirement changes or increases as a contract approaches its expiry due to the increased risk associated with holding the position closer to the expiration date. This is particularly relevant for options and futures contracts. Here’s how it generally works:

Increased Volatility: As expiry approaches, the price of the underlying asset can become more volatile, leading to larger price swings. This increases the risk for the broker and the exchange, necessitating a higher margin.

Exchange Regulations: The exchange stipulates specific margins (such as VAR and ELM) which increase incrementally in the days leading up to expiration. For example, the margin requirement for long in-the-money (ITM) options increases significantly in the last few days before expiry.

Physical Settlement: In the case of futures and options that are physically settled, there is an obligation to deliver the underlying asset, which further increases the margin requirements as the expiry date approaches.

Due to these factors, it is crucial for traders to be aware of the changing margin requirements and manage their positions accordingly.

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