Confusion Regarding Short Selling Index Options

Placebo

Well-Known Member
#1
I trade in and out of Index options with the 1st transaction being a buy and then a sell. I have yet to short sell an option of this type. Now what i am unable to figure out is if i go short on an Index Option will MTM be applicable if i hold the option for a few days ?? Or is the calculation done the same way as that of a regular one ?

Cheers
 

rkkarnani

Well-Known Member
#2
I trade in and out of Index options with the 1st transaction being a buy and then a sell. I have yet to short sell an option of this type. Now what i am unable to figure out is if i go short on an Index Option will MTM be applicable if i hold the option for a few days ?? Or is the calculation done the same way as that of a regular one ?

Cheers
When you BUY an Option the risk is limited to the Premium you pay and hence no MTM is applicable. There is "no margine' involved !
In case you SELL an option, you are getting Premium, your Risk is unlimited and Margine is also applicable, hence MTM comes into picture. Yes, MTM is applicable when you Short Sell an Option.
 

Placebo

Well-Known Member
#3
When you BUY an Option the risk is limited to the Premium you pay and hence no MTM is applicable. There is "no margine' involved !
In case you SELL an option, you are getting Premium, your Risk is unlimited and Margine is also applicable, hence MTM comes into picture. Yes, MTM is applicable when you Short Sell an Option.
That's just like trading the futures contract.

Anyway , thanks for the reply.

Cheers
 
#4
At least RKSV does not do MTM on short option positions. Full margin is reserved upfront (no intraday leverage) but premium is credited which can further be used as additional margin if required. Settlement is done at square off.

On another thought, shorting options is less risky if you can hold the position for a few days in the event of an adverse move by the underlying. It is a good strategy to book profits on time premium and a fall in IV.
 

Placebo

Well-Known Member
#5
At least RKSV does not do MTM on short option positions. Full margin is reserved upfront (no intraday leverage) but premium is credited which can further be used as additional margin if required. Settlement is done at square off.

On another thought, shorting options is less risky if you can hold the position for a few days in the event of an adverse move by the underlying. It is a good strategy to book profits on time premium and a fall in IV.
Hey

Are you saying that this MTM thing is dependent on the broker when short selling options ?

Cheers
 
#6
Not sure but it could be. At least not all brokers credit your account with premium from short positions, and yet others have intraday margins which RKSV does not provide. Best would be to call a couple of brokers of your choice to clarify.

Just to clarify, to me MTM is credit or debit of PnL at the end of business everyday. While RKSV does show MTM PnL for short options in their ECNs, settlement is done only at the time of square off, unlike for futures where PnL is settled everyday.
 

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