Calculation for Option Writing

General
1

Is there any particular formula to calculate the margin for option writing? It is standardized or specifies by the broker?

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Yes, there is formula to calculate the margin requirement for writing options. It is similar to Futures margins and is calculated on the basis of SPAN (Standard Portfolio Analysis) where they ascertain the maximum amount of risk possible on 99.9% of trading days.

For option writing, the margin requirement varies depending on the strike price and expiry date, but these are closely related to futures margins. You need to know that you cannot calculate this on your own as it has a lot of complex calculations.

Zerodha has made it very easy for retail guys to know the margin required for writing options. Check out this link: https://zerodha.com/margin-calculator/SPAN/

You'll never want to make these calculations on your own when it's so easy to go online and key in your positions and check out the margins.

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To add to Hanan’s answer one point you must remember:
If you have multiple option positions and futures too the total margin you will pay will be different from the sum of the margins on individual positions. A single short option position is closely related in terms of margin to the futures position, but if it goes in the money then the margin will be higher by the premium amount. For example for the Nifty 6000 call, when Nifty is at 6,600 the margin will contain the Rs. 600 that is the “intrinsic” value of the option along with whatever is calculated for exposure.
Also, if you have a spread position the total margin will be lesser. If you have a short 6,600 call, you may pay Rs. 25,000 (I’m just using this as an example). But if at the same time you go long the 6,700 call your margin will fall to something like Rs. 12,000. This is because the SPAN exposure calculations include your long call at the higher strike and reduce the margin requirement.
(Remember though, that if you sell your long call first, then the margin requirement will shoot up. Exiting a spread should involve squaring off the short position first, if you are margin constrained)

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Thanks for the input sir.
(While exiting, close the short position first)

5

Stop selling Zerodha Hanan… :slight_smile:

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I’m not selling Zerodha. Just because Google gives good search results, you cannot blame Google employees when they ask their friends/clients to google something.
Show me another website and I’ll change my answer. :slight_smile:

7

Do we have a consolidated excel sheet to show margin required for writing options? Just interested to see which stocks are more riskier than its counterpart. More the margin, more the risk.

Thanks!