This is what exchange charges, as a broker we just pass it over. Also after initiation of trade what if one closes longs? just shorts will be open, how to tackle it?
Even i am also facing the heat, SEBI is acting more like a gunda than acting as a market regulator with these absurd rules a policies and on the other hand RBI wont allow us to trade derivatives in foreign markets.These policy makers are trying to enforce a totalitarian regime with their communist mindsets.Who are they to decide what we trade and where we should put our money .
It’ll be logical if a person wanting to cancel the longs is asked for the extra margin instead of everyone including the the ones with a hedged strategy like the one in this example…
I don’t see this is as a reason.
If that’s going to be the case, then how do foreign markets work effectively?
Most of the foreign markets don’t require such large amounts of margin for such a trade.
They have banned Cryptocurrencies too . The fact about Indians not being allowed to trade derivatives in foreign markets is new to me.
Can you please send me a reference to some document that says it?
I am sorry Shiva. I know this is a exchange requirement but your reasoning is absurd.
Just like, you would close a position if the client doesn’t have margin a broker would do the same if a client closes the long position.
Let’s go back to the margin calculator and find out how much margin is required if I buy a NIFTY futures alone and how much is required if I cover it with a say 10500 PE. Margin reduces significantly. If I cover it with a ITM PE, margin required is still lower. Same is the case with IR.
Broker will auto-close the position if a long is closed without cover for a short position after a certain period of time! The certain period of time can be defined by the RMS based on day’s volatility or EOD whichever is earlier.
2x the max loss possible in a trade as margin is still fine. But 10x 20x 30x?
As Siva said, margins for F&O positions are determined by the exchange. Exchanges block margin as calculated by them with clearing member. Brokers have to report how much margin clients have at end of every day. If brokers allow clients to hold positions without sufficient margins, they and clients get penalized. It is not really in the hands of the broker.
What Siva was referring to was, assume you have a bull call spread 10600 calls Short and 10700 calls longs. What if you exit 10700 and there is no liquidity in 10600 and market moves against that position. On nifty near month, it might not happen, but what if it is some obscure F&O stock with no option liquidity. But yeah, there is a solution for this, don’t’ allow to exit the long options first, always force the short to be exited first. But what do you do when there are multiple short legs - like the short iron condor example of yours. You could exit one short, and there could be no liquidity in the other. Even if there was an order management system that had all this intelligence built saying which can be exited first, the exchanges today don’t’ recognize this and will block the margin according to them and penalize.
That said, ANMI (Association of NSE members in India) is putting up a representation to SEBI asking to rationalize margin requirements, and especially for strategies. Ideally, people should be encouraged to take such strategies with limited risk, instead of just trading naked options. This would be possible only if margin requirements drop.
Yes,there must be a solution for this.
I believe this requirement of such humongous margin amounts is one of the most prominent reasons for options in India being very illiquid.
This article talks about how broking entities were placing arbitrage trades between exchanges here and overseas.
Now an arbitrage trade is a trade that exploits the price difference of the same underlying in two different exchanges. It basically capitalizes the pricing inefficiency. This article says that it’s illegal for broking firms to place such trades. The RBI does allow any resident Indian to invest a maximum of $250,000 for conducting trades.
There is nothing saying that you’re not allowed to trade derivatives in the foreign markets.
Can check RBI faqs under LRS here it says under LRS $250000 is the limit per year per individual and under LRS trading on leveraged products is not allowed, but this is not the only way out to trade outside India.
