Margin requirements for option trading

neo · #1 28th December 2006, 06:18 AM

Hi guys,

There is something odd, which I noticed for Margin requirements for option trading. Writting some kind of options are totally risk free, If you hold a long position, your risk of writting call for same position would be 0, In fact you would get premium. Same is applicable, If you hold a long call, and you want to sell higher price call, your risk here would be 0.

I asked two brokrage houses about margin requirement for different kind of risk free option selling, And I was amazed to know that evenif I do a risk free Option trading, I would have to pay similar to F&O margin while selling option.

What I Asked is as below.
1. What are the margin requirements for covered call? would I need to pay for script long and call short?
ANS : Both side Full Margin + MTM
2. If I am long on 3800 nifty call and short on 3900 nifty call, do I need to pay any additional margin for short on 3900 nifty call short? Since I hold one long position, My risk for this trade would be the 3800 call premium - 3900 call premium, which I would be paying upfront.
ANS : For call buying you have to pay only call premium and for call selling you have to pay full margin of Nifty

It seems like whenever you sell option, All brokerage houses are asking for margin. Correct me If I am wrong and there is some brokerage house, which actually does not ask for margin for writting options (put/call), if You hold short/long positions in the same script respectively.

regards

swagat86 · #2 28th December 2006, 10:44 AM

C if ur writing a call ur under obligation to pay the buyer. on the other hand if ur a Buyer u pay only premium nothin else. Thats y the brokerages ask for Full margin like nifty.
I dont think any brokerage would do that becs the difference between ur Buying call and Selling call may hav a different implication.

Thanks
regards

juhi_verma · #3 28th December 2006, 11:52 AM

is it better to trade with a trading house or alone???

neo · #4 28th December 2006, 12:16 PM

Hey swagat,

If I am using covered call stretegy, I already have a nifty future long position and paid margin for this position, in this case If I write a call of let say 4100, What I am doing is just selling Nifty future to the call buyer at 4100, In case if Market tanks, My long Nifty position will give me unlimited loss, However my short position would not give any loss. Same way If market goes to 4500, I would have to pay 40000 to sold call, but that part I can cover from my long position.

The same is the case with having long call of 4000, and selling 4100 call. The maximum possible loss is paid upfront, No more loss...

So In either case, I dont see any requirement for collecting margin for sold call. Correct me If I am wrong.

swagat86 · #5 28th December 2006, 12:31 PM

Quote:

Originally Posted by neo

Hey swagat,

If I am using covered call stretegy, I already have a nifty future long position and paid margin for this position, in this case If I write a call of let say 4100, What I am doing is just selling Nifty future to the call buyer at 4100, In case if Market tanks, My long Nifty position will give me unlimited loss, However my short position would not give any loss. Same way If market goes to 4500, I would have to pay 40000 to sold call, but that part I can cover from my long position.

The same is the case with having long call of 4000, and selling 4100 call. The maximum possible loss is paid upfront, No more loss...

So In either case, I dont see any requirement for collecting margin for sold call. Correct me If I am wrong.

Ur right, becs ur using two different transactions to take a Covered call startegy. But not to forget they are two different transactions and are dealt differently by the broker and more importantly by the Excange.
And one more thing what ur cosidering is u hold till expiry. Pls do not forget that the movement of Options and futures hav different considerations. For am option they are Technical terms like Beta, Delta Gamma, no days away from expiry Liquidity etc. U gotta cinsider all this. And at times if ur MTM exceeds too much u may want to Sq off in middle of the month in that case u wud get nothin but a big Loss. Remember the basic idea behind covered call is to make sure that the Sold calls expire worthless. Only then its usefull.

Quote:

Originally Posted by juhi_verma

is it better to trade with a trading house or alone???

Didnt get u exactly?????

neo · #6 29th December 2006, 12:46 AM

swagat,
In case we endup in extreemly volatile market, the sold call value will go up, but even in that case, we would not require full margin. I would agree that we need some margin in this case for sold call, However this margin requirement should be very low.

When NSE will link option settelment with deliverable stocks, we would see a situation where One person might be holding 300 Reliance stocks, If he wants to sell them after 1 month at specified price and collect premium on it, he would be needing big ammount of margin (usually 25% of the stock value).

My point here was, Wether to consider these stocks (or in case any other long position) as a margin or not, And If there is some extra margin required other than this, what should it be.

I was not sure about NSE margin requirements, Specifically that they deal each transaction saperately. What I thought is that the brokers collect more margin from all individual, but report very less margin to NSE because some long position would nullify some of the short position, and thus earn interest on our submitted margin.

juhi_verma · #7 29th December 2006, 10:52 AM

I was just wondering if its better to trade alone as an indivivual investor or with a trading house.... posted it in this mail by mistake

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