What is MTM (Mark-to-Market)? How Daily P&L Is Settled in F&O
Mark-to-Market, or MTM, is the daily settlement process in F&O trading where your open positions are revalued at the closing price every day, and the profit or loss is actually settled in cash. If your position made a profit today, the money is credited to your account. If it made a loss, the money is debited.
In delivery equity investing, your P&L is notional until you actually sell. In F&O, the P&L is settled every single day through MTM. This means your account balance changes every evening based on how your positions performed that day, even though you have not closed the position.
How does MTM work with an example?
You buy one lot of NIFTY futures at 22,000. At the end of the day, NIFTY closes at 22,150. Your MTM profit is 150 points multiplied by the lot size. This profit is credited to your trading account.
The next day, NIFTY closes at 22,050. Your MTM loss from today's close to yesterday's close is 100 points. This loss is debited from your account. Your reference price for the next day's MTM is now 22,050, not your original 22,000.
MTM Profit/Loss = (Today's Close - Previous Day's Close) x Lot Size
Why does MTM exist?
MTM ensures that losses are collected daily rather than accumulating until expiry. Without MTM, a trader holding a losing position for a month could accumulate massive losses that they cannot pay at the end. Daily settlement keeps the risk in check for the broker, the clearing corporation, and the entire market system.
| Day | NIFTY Close | Daily MTM | Cumulative P&L |
|---|---|---|---|
| Day 1 (Entry) | 22,000 | Entry price | 0 |
| Day 2 | 22,150 | +150 points | +150 |
| Day 3 | 22,050 | -100 points | +50 |
| Day 4 | 22,200 | +150 points | +200 |
F&O trading involves substantial risk. Daily MTM can cause cash debits even when you intend to hold. This article is for educational purposes only.
Frequently Asked Questions
I have not sold my futures position. Why was money debited from my account?
That is MTM. Even though you are still holding the position, the exchange settles the daily loss in cash. If NIFTY fell 100 points today, the loss is debited from your account tonight. This happens every day until you close the position or it expires.
What happens if I do not have enough money to pay MTM?
Your broker will issue a margin call. If you do not add funds by the next morning, the broker can square off your position. MTM debits must be funded. Not having sufficient funds to cover MTM losses is one of the most common reasons for forced position closures in F&O trading.
Does MTM apply to options as well?
MTM applies to futures positions and to short (written) options. If you buy an option, your maximum loss is the premium paid, which is collected upfront. You do not face additional MTM debits as an option buyer. Option sellers, however, face MTM because their potential loss is larger than the premium received.
When is MTM settled during the day?
MTM is calculated at the end of the trading day using the daily settlement price, which is typically the closing price of the futures contract. The actual cash settlement happens after market hours and reflects in your account before the next trading session begins.
Does MTM affect my tax calculation?
MTM profits and losses are used for calculating business income from F&O trading. For tax purposes, the final P&L on a closed F&O position is what matters, not the daily MTM movements. However, daily MTM affects your available cash balance, which can impact your ability to take new positions.
Investments in securities market are subject to market risks. This article is for educational purposes only and does not constitute investment advice.
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