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[Karthik]

@Shivam_Pandey

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 ?

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.