@Karthik @nithin
I actually love the way you have written and explained in varsity karthik. But something was not cleared or might be i haven’t paid attention, My doubt is that the amount required to sell a particular strike price lets say 17700 CE and the LTP somewhere is lets say 30 rs and the margin required is 91000rs. Now till what LTP zerodha system will allow my trade to hold even in losses,
You get it till what LTP my position would not be auto squared off. Whats is that margin for that 91000 is being charged, is that like the maximum loss of 91000 system can bear after that auto square off or like anything else?
You get my question right i shorted at 30 and till what LTP system can bear that position ?
Hi @nithin, thank you for this opportunity.
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When we sell OTM options and let them expire, we earn premium. But how would exchange/brokerages be profitable? This question has been on my mind since very long, tried googling but couldn’t get proper answer.
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This is on options trading.
Could we please get some indicator in zerodha which mentions max margins required in the case of volatility or days passing? As a small trader, it’s hard to keep an eye on margins consumption. Or some kind of indication/alert on web app/mobile app would be even better before margins consumption.
Instead of losing on penalty, it’ll help to exit/add more funds in advance.
There are a few exceptions where market making is allowed to improve liquidity in scrips.
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ETFs or exchange traded funds. To ensure there is enough liquidity and also to popularize ETFs, SEBI allows market making. So there are brokers who empanel with the AMC running the ETF as market makers and provide liquidity on the exchanges. Market makers make money in the spread - the cost of creating an ETF vs what they sell on the exchange, and vice versa.
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Both the exchanges run an SME (Small and medium scale enterprises) platform for companies who don’t qualify to list on the mainboard. Market makers are allowed here as well for better price discovery. This is also because interest in SME stocks is very less currently. Exchanges pay market makers for creating liquidity.
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SEBI is now talking about allowing market-making in debt instruments to popularize investing in them.
Btw, not really market making but the exchange does run a liquidity enhancement scheme every time there is a new type of derivative contract introduced. This is to encourage brokers (mainly for those who are prop trading) to participate and provide liquidity until everyone else starts participating. In a liquidity enhancement scheme, exchanges pay brokers a small fee for the turnover on the exchanges.
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Hey Karan, I have answered this above.
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Warren Buffet did it through Berkshire Hathaway, right? It is a publicly listed company and not a partnership.
Btw, check this on managing others money in the Indian context.
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Glad you liked the content on Varsity, Shivam 
You need to keep track of both the price and volatility, margin is a function of both. Margins increases if the price moves against your position or if the volatility increases. For example, if the price increases from Rs.30 to Rs.100, then the margin requirement will go up by Rs 8500 ( Rs 70 x 50). But at the same time, if the volatility drops, then margins may stay intact. So it is really a function of price and volatility.
Let’s say at the time of writing the option, the margin required is 90K and you have only Rs 90k with you. Assume the volatility increases or position goes against you and now the margin requirement increases to 1L…this is roughly 10% more than what is the money in your account ( so your margin utilization is now 110%).
Since you don’t have sufficient margins now to hold this position, we will notify you to fund your account by 10k to fulfil the margin requirement. This is also popularly called ‘the margin call’.
Likewise, we will notify you regularly as and when the margin increases, but if you fail to fulfil the margin requirement, then the position will be squared off anytime after 120% margin utilization. In this example, 120% of 90K is 1.08L.If we don’t square off the position, exchanges charge a short margin penalty at the end of the day for allowing a customer to hold the position without the minimum SPAN+Exposure margin.
Unlike futures where there is a daily marked to market or profit or losses get debited from your account, in case of short options it works differently. Instead of losses getting debited from your account, the margin goes up in the account which is usually approximately equal to the loss. This is because unlike in futures where the loss can be debited and given to the counterparty, in options the counter to the short option trade is the person who has bought options. You can’t give notional profits to the person who has bought options who has no margins placed on the exchange.
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Yes I will check it thanks.
btw before Berkshire Hathway, he run a partnership firm called Buffet partnership for around 20 years. I was talking about it.
Exchanges (charge transaction charges) and brokers (charge brokerage) don’t earn any money on options that expire worthless. At least most brokers don’t earn, there are a few brokers who charge brokerage on expired options with no value as well. While they don’t earn from expired options, they earn from all other transactions on the exchange. There is enough revenue generated.
Margins are a factor of volatility. No one knows how much volatility can go up in the future. So this is an extremely tough problem to solve for. As a trader I don’t think you should be trading with maximum money in your account at any point, that is the only way to cover yourself from not just this risk of margin going up but the risk of having huge losses as well. If you are trading with just 10 to 20% of your trading capital, you will not need to be worried about margins going up.
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@nithin 1. I’m doing short term equity trading while holding the stock is it advisable to pledge it for margin and do intraday option selling without cash component.
2. How to resist the temptation of getting rich quick ( taking aggressive bets).
@nithin
Thank you for the detailed answer Sir!
I showed it to my twelve year old daughter and she was super excited to see that CEO of Zerodha has replied to her dad. We trader friends call you Amitabh Bachchan of stock broking. 
I had asked the question because some times bid-ask spread is too wide in stock options and liquidity becomes an issue.
Thank you once again. You made my day 
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Like I mentioned a bunch of times above, lower the leverage - higher your odds of being profitable. Trading is about not putting yourself in positions where you end up panicking and doing stupidity. One such situation is enough to blow your account up.
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Option selling has a slight edge over all other types of trades because as an option seller you have time in your favour. Every minute market doesn’t move, the option loses time value which is your profit. But this really plays out well only when you hold those option short positions for longer. The effect of time value reducing doesn’t really play out if you are doing intraday trading.
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I think the easiest way to do this is to keep only say 25 to 30% of your capital in your trading account. If money is in the trading account it is very tough to resist. Keep the rest of the capital in a bank account where you maybe don’t even have online access.
But yeah, easier said than done. The reason why only maybe 1% of the folks can actually make more than bank fixed deposit returns from the market in the long run.
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how to learn institutional trading ?
There is no course that teaches you ‘institutional trading’. Everyone in the market sees the same ticks and volume. What differs is the way you react to it. Institutions tend to have larger capital, have mandates to manage that large capital, and also have processes in place.
Institutional traders are liable to answer to their board or customers if they deviate from that mandate.
It’s the exact opposite for a typical retail trader. Capital size is small and they are rash with their trading and investing decisions. Retail traders are not accountable to anyone expect for themselves.
Capital aside, you can transition from retail to institution by changing your mindset and incorporating discipline in your approach to the market. Of course, this is easier said than done, it takes years of practice of doing the same thing over and over again.
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What’s the difference btw pull back and reversal and how to identify and differentiate between them.
If a stock is in an uptrend or prices generally have been going up and then the price goes down followed by a bounce-back in price, it is called a pullback. Pullback because the uptrend is still maintained. If the price doesn’t come back up and continues falling that is a reversal as the uptrend is now reversed and the stock is in a downtrend.
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We can note the swing lows/highs for the stocks that we are tracking. If the swing lows/highs are not breached, we can consider it as a pull back. Pull back will generally lead to the formation of higher lows and higher highs thereby continuing the trend.
If the swing lows get breached continuously and the pattern of higher lows and higher highs is breached, we can consider the possibility of beginning of a corrective wave.
The catch here is what timeframe are we looking for and that can be decided by the trader him/herself.
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Thanks For explaining like a pro…
Does Markets really have manipulators? I mean people do set a stoploss and after it get hits the stock moves in the way they have thought, does someone wantedly can conrol this?
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