Option writing: What happens when premium increases?

F&O
1

I needed some clarification please on option writing/selling.

For e.g: Nifty spot is at 10900 with just 5 trading days left to expiry. So if I sell
11000 CE option at premium of Rs 40 and blocked margin of around Rs75K.

  1. Now if next day the premium rises to Rs 50 (though Nifty has still not crossed 11,000) will I have to shell out extra margin money for the Rs 10 increase in premium?

  2. And if next day premium goes down to Rs 30, will margin money requirements also go down?

thanks in advance

2

There are no marked to market(MTM) losses/profits for option short positions. However, the margin requirement can increase or decrease based on the following points:

  1. Price change(% change during the day)
  2. Change in volatility(increase in volatility of the contract increase the margin required)
  3. Time to expiry(Margins reduce as it gets closer to expiry)

The exchange updates SPAN files 6 times during the day and you’ll see the difference in margins blocked for the positions during the day.

3

OK and just in case my entire margin + extra cash in Zerodha is used up due to some wild shoot up in premium will it be auto-squared off?

4

Yes, if your account balance results in a negative balance, a margin call SMS/Email will be triggered to you to add funds. Your positions will be squared-off if funds are not added after the margin call is sent.
The square-off can happen sooner if there is a sudden increase in market volatility at the discretion of our RMS team.

1 Like