How To Reduce Margin Requirement In Option Trading

Monday, 30 August 2021

HOW TO SMARTLY REDUCE MARGIN REQUIREMENT IN OPTIONS TRADING

As we all know that due to SEBI peak margin guidelines, Intraday leverage has considerably reduced in the last 1 year thus increasing the margin requirement for trading. We can follow the below steps to smartly reduce our margin requirement in OPTION Selling

Example 1.  Convert naked option sell trades to hedge position by buying OTM option

If you sell naked NIFTY September 16700 CE the margin requirement is approx. 1,00,000 and the premium gathered is approx 16000  ( Refer Margin Calculator). Now if you buy OTM NIFTY September 17500 CE along with it the total margin requirement reduces to 50% i.e 49000 approx ( Refer Margin Calculator).

Please note buying the OTM option reduces the net premium that you gather but it also reduces the NET Margin Requirement thus increasing the overall yield. Further, it protects you from unlimited risk in case of adverse market movement

Example 2. Trade-in BANK NIFTY Futures which requires a margin of 1,58,000

If you sell naked BANK NIFTY September Futures the margin required is 1,58,000  ( Refer Margin Calculator). However, if you buy OTM BANKNIFTY September 38000 Call the net margin is reduced to approx 16000  ( Refer Margin Calculator). Further, it protects you from unlimited risk in case of gap up market opening

So If you Sell Futures then buy an OTM call and If you Buy Futures then buy OTM Put to hedge your position. Buying an ATM option is a little expensive but offers good protection compared to buying an OTM option which is low cost but offers not much protection. Margin requirement in both cases is reduced considerably compared to trading naked futures. 
 


Comments

 
  1. sir
    example I sell one lot of future stock and sell one lot of put near the money then actually margin is more
    why so
    but for same position instead buy a call margin is reduced with huge diffence
    pl explain
    can I hold the position till last date of expiry with out addition margin for my first trade example?

    venkatakrishnan (August 31, 2021 at 05:35pm)
 

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