I want to understand margin blocked in US stock market for index hedged option strategies
vs
margin blocked in Indian stock market for index hedged option strategies
Let us say i have ATM short Ironfly for next weekly expiry in NIFTY options
BUY 24750 PE (19 JUN 2025) @ 51.1
SELL 25150 CE (19 JUN 2025) @ 187
SELL 25150 PE (19 JUN 2025) @ 171.15
BUY 25550 CE (19 JUN 2025) @ 46.45
Margin required to enter trade = 1,12,000
Margin required to maintain trade = 85,609
Max Margin = 1,12,000
Max Loss = 10,455
Max Margin : max loss Ratio = 1,12,000/10,455 = 10.71
I might lose approx. 10000 in this trade, but i have to keep 1.1L in account. Which is insane.
I understand it is a risk mitigation measure taken by authorities.
But for a seasoned profitable trader, this margin block seems to be a big hurdle…
(Do not ask me about ELM on expiry days, I will blast the authorities more… )
I think and suggest the margin blocked should be 2x or 3x of max loss…
Can someone post similar stats for US market or other countries markets to help me understand these insane trader-hostile measures by Indian authorities…
For a similar Ironfly in US market ,
What is the Max Margin used ?
What is the Max loss ?
What is the Max Margin : max loss Ratio ?
I am eagerly waiting for your reply.
Thanks in advance.
In US all the trades won’t happen on exchange, means order counter party can be anyone, broker can be your counter party or brokers can send orders to dark pools so those are executed.
There is a concept called RFQ, request for quotation.So, user can input legs and ask for quotation and broker can offer it from various sources and earn on marking little high spread.
For example if one want to execute a spread, in India there is no way we can either fully execute or reject it fully. There are chances that one leg is executed and others not.
In this case max loss can vary if hedge leg is closed and other is open but in US either full spread will execute or it will not but no half measures.
So, unless spreads are traded fully this max loss must be margin concept won’t be possible, exchanges only can facilitate it in India unlike in US where broker also can do.
There should be an option to execute a spread, either fully execute it or reject it fully.
If I can place an order, it will be executed fully or rejected fully.
Why not do the same for multi leg orders ?
There are options to make of execution promised multi leg order.
The multi-leg-orders can only be allowed in liquid expiries.
like… index expiries on current week and current month only.
To give an example,
Zerodha baskets with 4 leg market orders can be used.
If you think market order can trigger any freak trades, then it is possible with limit order too.
In case of limit orders , the limit price should be above 5% (of LTP) for all buy order and below 5% (of LTP) for sell orders at the time of execution.
This promises execution without freak trades.
To be on safer side, You can block margin for 1-2 minutes for confirming the execution of all 4 trades.
Then the margin blocked should come down say 2x of max loss.
The authorities can give this option and reduce margin if they want to help traders.
Or
They can plan on devising a new tax to levy on each order to take away money from traders.
Then, sway away trader from market by preaching “9 out of 10 individual traders in the equity Futures and Options Segment, incurred net losses”.
Point is even if we offer this, margins blocked are decided by exchanges, so irrespective of what we do exchanges has to offer these baskets at exchange level or give directives to brokers to offer these kind of orders for which they can reduce margins.
Final point is broker can’t do anything with respect to margins unless rules are changed at exchange level.
I understand Zerodha or brokers cannot do anything on this regard.
I want to open a discussion on this for a long time.
Someone in the deciding position, have to come to their senses to make this happen.
All the trader/investor protection initiatives are waste without actually empowering them.
The empowerment come with sensible regulations and rules.
As mentioned in the below Varsity article, someone in authority came to their senses and proposed new margin framework… (1st June 2020) for hedged strategies…
I hope that person will see this post and rethink about providing multi leg orders and new margin framework V2…
)