Understanding Options Trading Margin Requirements For Naked Options

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Margin is a very widely used word in financial terms, but it's unfortunately a word that is often very confusing for people. This is largely because it has a number of different meanings, depending on what context it is being used in. In particular, writing options margin requirements meaning of the term as used in options trading is very different to the meaning of the term as used in stock trading. The phrase profit margin is also a common term, and that means something else again.

On this page we explain what the term margin means in these different contexts, and provide details of how it's used in options trading. Profit margin is a term that is commonly used in a financial sense in a variety of different situations.

The simplest definition of the term is that it's writing options margin requirements difference between income and costs and there are actually two types of profit margin: Gross profit margin is income or revenue minus the direct costs of making that income or revenue. For example, for a company that makes and sells a product, their gross profit margin will be the amount of revenue they receive for selling the product minus the costs of making that product.

Their net margin is income or revenue minus the direct costs and the indirect costs. Investors and traders can also use the term profit margin to describe the amount of money made on any particular investment. For example, if an investor buys stocks and later sells those stocks at a profit, their gross margin would be the difference between what they sold at writing options margin requirements what they bought at.

Their net margin would be that difference minus the costs involved of making the trades. Profit margin can be expressed as either a percentage or an actual amount. You may hear people refer to buying stocks on margin, and this is basically borrowing money from your broker to buy more stocks. If you have writing options margin requirements margin account with your stock broker, then writing options margin requirements will be able to buy writing options margin requirements stocks worth more money than you actually have in your account.

If you do buy stocks in this manner and they go down in value, then you may be subject to a margin call, which means you must add more funds into your account to reduce your borrowings. Margin is essentially a loan from your broker and you will be liable for interest on writing options margin requirements loan.

The idea of buying stocks using this technique is that the profits writing options margin requirements can make from buying the additional stocks should be greater than the cost of borrowing the money. You can also use margin in stock trading to short sell stocks.

Margin in futures trading is different from in stock trading; it's an amount of writing options margin requirements that you must put into your brokerage account in order to fulfill any obligations that you may incur through trading futures contracts.

This is required because, if a futures trade goes wrong for you, your broker needs money on hand to be able to cover your losses. Your position on futures contracts is updated at the end of the day, and you may be required to add additional funds to your account if your position is moving against you. The first sum of money you put in your account to cover your position is known as the initial margin, and any subsequent funds you have to add is known as the maintenance margin.

In options trading, margin is very similar to what it means in futures trading because it's also an amount of money that you must put into your account with your broker. This money is required when you write contracts, to cover any potential liability you may incur. This is because whenever you write contracts you are essentially exposed to unlimited risk. For example, when you write call options on an underlying stock you may be required to sell that stock to the holder of those contracts.

If it was trading at a significantly higher price than the strike price of the contracts you had written, then you would stand writing options margin requirements lose large writing options margin requirements of money. In order to ensure that you are able to cover that loss, you must have a certain amount of money in your trading account.

This allows brokers to limit their risk when writing options margin requirements allow account holders to write options because when contracts are exercised and the writer of those contracts is unable to fulfill their obligations, it's the broker with whom they wrote them that is liable. Although there are guidelines set for brokers as to the level of margin they writing options margin requirements take, it's actually down to the brokers themselves to decide.

Because of this, the funds required to writing options margin requirements contracts may vary from one broker to another, and they may also vary depend on your trading level. However, unlike the requirements when trading futures, the requirement is always set as a fixed percentage and it isn't a variable that can change depending on how the market performs.

It's actually possible to write options contracts without the need for a margin, and there are a number of ways in which you can do this. Essentially you need to have some alternative form writing options margin requirements protection against any potential losses you might incur. For example, if you wrote call options on an underlying stock and you actually owned that underlying stock, then there would be no need for any margin.

This is because if the underlying stock went up in value and the contracts were exercised you would be able to simply sell the holder of the contracts the stock that you already owned. Although you would obviously be selling the stock at a price below the market value, there is no direct cash loss involved when the contracts are exercised. You could also write put options without the need for a margin if you held a short position on the relevant underlying security.

It's also possible to avoid the need for a margin when writing options by using debit spreads. When you create a debit spread, you would usually be buying in the money options and then writing cheaper out of the money options to recover some of the costs of doing so.

Assuming you buy the same amount of contracts as you write, your losses are limited and there is therefore no need for margin. There are a number of trading strategies that involve the use of debit spreads, which means there are plenty of ways to trade without the need for margin.

However, if you are planning on writing options that aren't protected by another position then you need to be prepared to deposit the required amount of margin with your options broker. In reality, even if you are trading futures options this isn't something you really need to concern yourself with.

However, you may hear the term used and it can be useful to know what it is. The SPAN system was developed by the Chicago Mercantile Exchange inand is basically an algorithm that's used to determine the margin requirements that brokers should be asking for based on the likely maximum losses that a portfolio might incur. SPAN calculates this by processing the gains and losses that might be made under various market conditions.

As we have mentioned, it's far from essential that you understand SPAN and how it's calculated, but if writing options margin requirements do trade futures options then the amount of margin your broker will require will be based on the SPAN system. Full Explanation of Margin Margin is a very widely used word in financial terms, but it's unfortunately a word that is often writing options margin requirements confusing for people.

Section Contents Quick Links. Profit Margin Profit margin is a term that is commonly used in a financial sense in a variety of different situations. Writing options margin requirements in Stock Trading You may hear people refer to buying stocks on margin, and this is basically borrowing money from your broker to buy more stocks.

Margin in Futures Trading Margin in futures trading is different from in stock trading; it's an amount of money that you must put into your brokerage account in order to fulfill any obligations that you may incur through trading futures contracts. Margin in Options Trading In options trading, margin is very similar to what it means in futures trading because it's also an amount of money that writing options margin requirements must put into your account with your broker.

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Most retail traders usually buy options, i. Selling options is used when exiting options that were already bought. What this means is that by buying an option calls or puts the odds of losing are significantly more.

Now the question is if options buyers are inherently taking a higher risk, who is on the other side of the trade with better odds of winning? Let me explain with a basic introduction to what comprises option premium, different types of options, open interest and an example showing how most options expire worthless.

Option premium, the value of calls or puts that you see on your trading screen has two components, Intrinsic value, and time value. Intrinsic value is how much the option is in the money, or simply how much you would get if the options were to expire right now. Time value is the portion of premium which is over and above the intrinsic value of an option, i.

The total number of open contracts for any option is called its Open Interest. In the example above if Nifty were to expire today at , the total options that would expire worthless would be: Yes, an option buyer can take quick intraday trades for a profit, or be on the right side of the market and have the potential of making unlimited profits, but the odds of winning are always in favor of an option writer who benefits with majority of options expiring worthless. An option buyer has limited risk and unlimited profit potential, so if 1 lot of Nifty call was bought at Rs , the maximum loss on this trade is the Rs Rs x 50 , and if Nifty went to the call would make a profit of Rs 45, When you write an option, say 1 lot of calls at Rs , Rs Rs x 50 which is the premium paid by the buyer is credited to your trading account and this Rs on the premium is your maximum profit potential.

After taking this trade if. Since the potential losses are unlimited, it is best as a beginner option writer to be conservative, and allocate only a small portion of your trading capital when starting off. Since the risk is unlimited for an option writer, the exchange blocks margin and similar to futures is marked to market at the end of every day.

So to buy an option at Rs , you need to have only Rs Rs x 50 , but to write an option you will need around Rs 25, which is marked to market daily, which means that if there is a loss you are asked to bring in those funds to your trading account by end of the day. Option writing margin requirement varies for every contract, and as on today Zerodha is the only brokerage in India to offer a web based SPAN tool that lets you calculate this.

You have a bearish view of the market and Nifty is presently at Check the SPAN calculator for the margin required as shown below:. Love playing poker, basketball, and guitar.

Around Rs required to short option. You can check it out yourself here: If i am exiting the call written mid way , is the process in Zerodha same as in case of buying a option..

I mean just by a single click on exit option i can the call option written. Can I hold the options over night [or till expiry] after shorting or is this settled at EOD automatically everyday? Will you charge interest for margin provided? Should I buy back my option before expiry or should I leave it to expire, especially if it is in the money ITM.

I have written November call , now today is expiry day, if market closes above what should I do? How we calculate vix for a stock like Infosys, Last time 11 October Result Day I observed that Option prices increased from 6 October to 10 October, this time prices decreased from 6 Jan o 10 Jan.

Calculation of Vix for a stock is pretty complex, let me see if I can find tool for you, nothing in the back of mind. Dr Sir I a little confused on This point Nifty is on expiry, value of calls on expiry is 0, and you get to keep the entire Rs Nifty is on expiry, value of calls is still 0, and you get to keep the entire Rs Did You mean no profit no loss?

In mis at I totally agree with you. Very important and required information for all of us. I understand that margin is required when one writes the naked option and has to arrange MTM funds. A question in my mind for a long time is, when one takes a debit spread, say long call and short call, the maximum the person looses is the difference in premium which was already paid.

In such a case why should a margin be collected, though the margin is less than naked option writing? Is it not sufficient to block selling the long option alone before covering the short option?

The margins blocked are as per the exchange requirements, and yes the Indian exchanges are extra stringent about this. Coming to your example, Long call and Short call, and assume only Rs 10, is blocked for this the buy premium. Yes the scenario is unlikely, but possible. I guess the only way such spreads will become popular is if NSE starts letting people trade the spreads directly itself, similar to calendar spreads. I want to write call and put nifty options Positionally.

In this case we can get profit from premium melting. Other wise the lose also will be minimum and limited. Can you give exposure? For above trading method, what is the margin for 4 lots qty? Ranganathan, you can check all margin requirements on our SPAN calculator: Krishna, it depends on what spread you are taking, check this blog on SPAN calculator , which shows how you can see the margin requirements of such spread using our SPAN calculator.

Just tried out your suggestion, but the math does not add up. Suppose I get into a bear call spread on Nifty, as follows:. SPAN margin — Rs: The total margin required is still Rs. The maximum loss on this spread is only Rs. The risk is limited, and so should the margin. The difference between the return on capital is almost 5x. Why is the margin benefit so little?

Is it possible to enable SPAN minimum requirements on individual trading accounts? Guc, what you need to realize is that the risk for such contract is never limited, there is always a big execution risk which is open and one of the reasons why margins are higher.

What if while exiting you got out of your buy CE position and market suddenly bounced up in this little time? The risk on your short CE would then be unlimited. Unless the spread itself starts trading on the market similar to calendar spreads , it will never be possible to block margins based on what you have suggested. Also, this is an exchange regulation and the SPAN calculator gives what exchange asks us to block. DC, advisory is tricky because: People will never follow advise properly, but the adviser is liable for it..

If it starts working, traders will become puppets to the adviser. What is missing is the liquidity, basically we need a lot more traders coming to the market, when they do, new products will automatically come about.

The bigger problem for everyone to solve is bringing in liquidity to the markets. I wish you include two parts like buying and writing in brokerage calculator. Which helps writers to include STT.

STT changes for option buy positions, if it is in the money and you let it expire. You can read this blog for that.. If you look at the default example on http: If it is possible to set a trigger in the trading terminal for executing option strategy, it makes life easier. I mean when nifty futures trades at a set price, then the option strategy gets executed at market prices. Something like SL-M order. Setting trigger like what you said, take an option strategy if Nifty trades at a price, it is little tricky, mainly because of the regulations.

Exchange would consider that as an algo, which is not allowed for retail. For In the money options, Do we have facility to exercise the options at Spot price at end of Day?

How it will be carried out. Mukesh, all Indian options are Europen options. If you exercise them, they will be cash settled. For more, check out the options trading module on Varsity. Nitin, On the last line algo for retail , there were a couple of SEBI circulars which wanted brokers to demonstrate appropriate risk management processes before offering algo access to their customers.

Is there some SEBI circular that prohibits retail from using algos? Is there also a SEBI circular under which exchanges derive power to validate algos? What SEBI has recently mandated is that for brokers providing algo, to compulsorily take part in mock trading sessions and a stricter audit. Let me try getting you the circular numbers on these. Hi This is very wonderful article. Really I appreciate you. Recently I have opened trading account with OpetionsXpress.

It is really wonderful system for trading in Options and Futures. I recommend to you to visit that site and create a Virtual trading account and evaluate the platform which they are providing to their clients. Still we are far behind in technologies. Sir, I appreciate you.

It is a very good article.