Why don’t most brokers provide Intraday options buying through cash component Pledged funds/g-secs? some brokers i guess provides. Is it because in option buying the client pays the premium?
Hey @Michael_Burry
When purchasing options, you are effectively making a cash payment, which is then credited to the writer of the option. For instance, if you buy Reliance options valued at Rs. 10,000, you will experience a cash outflow of 10,000, which will be credited to the option writer.
On the other hand, when trading futures, only margins are blocked. If you sell one lot of Nifty, the Exchange imposes a margin requirement on your account, and similar margins are also imposed on the buyer’s account. There is no direct cash outflow for the trader in this scenario.
When you pledge your stocks with a broker, who in turn pledges them with the Clearing Corporation, you receive margins rather than cash. Consequently, you cannot use these margins to purchase options because, as mentioned earlier, acquiring options would require you to pay cash to the option writer. Since the broker only provides you with margins, you can utilize these margins solely for taking positions in futures or short options. If a broker allows you to buy options using collateral margins, even intraday, they are essentially financing your purchase.
Please note that the distinction between margins and cash is that margins represent trading limits, whereas cash refers to your actual cash balance, which can be withdrawn.
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When there is a loss in the short option position over and above the premium collected or loss in short future there is cash outflow for the trader. Ain’t that the case ?
Is that a problem ? I guess the free financing against pledged collateral is better for the client than loan at interest against securities.