I have gone through numerous covered call questions in this forum and no where I found satisfactory answer so opening new question.
I am trying to create covered call with my stock holdings (Adani Port shares). I have them in my Demat account of Zerodha. Whenever I try to sell option against this equity holdings, Kite charges full margin which defeats purpose of covered call.
Zerodha should think carefully on this margin requirement and this redirects people away from covered call and also discourages equity buying. In short, Zerodha forces people to be trader than investor with such margin requirement.
This kind of margin discounting will not just help investors better hedge against market upsides and downsides but also help Zerodha as broker will build more profitable investors and traders community on their side.
Kindly rethink on this incorrect margin req. which I believe is not problem of exchangee but broker issue and may be corrected from Zerodha to help people trade and invest better.
For shorting the option, you will have to maintain SPAN + Exposure margins as stipulated by the exchange. You can however pledge the holdings and use the margin received for selling options. You can learn more about pledging here:
NSE allows physical delivery of shares so margin can be in shares. This is not exchange restriction. It appears to me again Zerodha do not understand covered call.
Pledging shares is about collecting money in exchange of shares. This is not what covered call is.
Covered call is when you hold enough quantity of shares in demat and you sell option against these shares to help through market fluctuations.
Zerodha seriously should consider reading this topic.
Answers I got though volunteers reflect bad understanding of exchange rules and option strategies.
SPAN and exposure margins will always be required to sell options. For your covered call, the margins required for selling call options won’t be reduced even though you have those underlying shares in your demat account.
If you wish, you can pledge the underlying shares(ADANIPORT) and utilize the collateral margins to sell the option. That’s what @ShubhS9 tried to convey in the previous post.
You are correct @Aswath at span and exposure margins will be applicable depending on market and exchange policies from time to time. However, if you hold shares in demat, you are not bound to pay exact span and exposure margins of that of naked call. My point is Kite software will apply same margins to naked call sell as covered call, which defeats purpose of covered call.
Another way to check this case is if you buy futures of say Adani ports and sold call option against it, your margins are drastically reduced which do not happen with equity holdings which is problem and nothing to do with pledging or exchange regulations. It is problem of Kite software margin utilization.
Bhushan, this is not an issue. The exchange gives margin benefit for hedged F&O positions (For example. Long futures and Long PUT). While there is no margin benefit if you hold underlying shares and take short option position in that stocks option contract.
As explained above, one way you can benefit is by pledging the shares and using the margin received to fulfill the margin requirement for short option position.
Also, when you pledge the shares, these stay in your demat account only and there are no charges for using the collateral margin.
However, the exchanges stipulate that for overnight F&O positions, 50% of the margin needs to compulsorily come in cash or cash equivalent collateral, and the remaining 50% can be in terms of non-cash. If you use non-cash collateral in excess of 50% then interest is applicable at 0.035% per day.
@ShubhS9 see problem is you have confused pledging with securities required for FnO positions.
Here’s exchange link that allows shares as security (https://www.nseindia.com/products-services/equity-derivatives-margins). You are correct with point that cash will be required in addition to securities, but intent of exchange was to ensure no shortfall of collateral position when share swings in value.
Problem I see with Kite margin is they have not considered 4th collateral situation where shares are used to hold position in FnO.
You have pointed out pledge shares will give cash which can be used to take FnO position but this is completely different case, this does not address margins required are high as naked call sell. What I am saying is exchange allows shares to be used as collateral in FnO positions and respective margin discounts are allowed.
If you still doubt this case of collateral, we can check easily with NSE to clarify further. I believe as per NSE policy, it is upto broker to collect margins in all allowed means (as prescribed by NSE) which allows “Approved securities in demat form deposited with approved Custodians.”.
I tried to get an answer (and a solution) for covered calls but I gave up because it was difficult to make people understand what it (covered call) is.
Either the person who wrote the policy at NSE does not know what it is or the brokers have always interpreted it differently.
Yes @pnsudesh you are correct, it is frustrating to explain NSE policy to broker. NSE knows covered call for sure as they clearly note securities are allowed in exchange of margin. But I had gone through multiple such questions and have came to conclusion that Zerodha do not understand covered call especially one holding with shares. They have completely ignored sections where exchange says you can avail margins with discount with help of shares or FDs from authorised banks.
This is problem with broker and we need to highlight it so they can correct.
If required any clarification, broker can always reachout to NSE for clarification. So it is nothing wrong we users of Kite platform are demanding.
I hope Zerodha being leading broker will take issue and address it and so I have raised this issue after reading several threads.
But there are practical work arounds to handle this issue or in-efficiency that you are referring to. Work around because no body can predict when the broker or exchange will implement it as per the text book definition.
theory: covered call should reduce the margin requirement on the call option sold since you have physical shares available in case the CE goes ITM
lets say you have 8 lakhs worth of shares with you. A naked call will be charged at say 1.5 lakhs margin… Which means you need to have 8+1.5 = 9.5 lakhs
in reality you dont need this, you can pledge the shares that will get you 1.5L leverage & still take the short CE position with a total account balance of 8 lakhs (ultimately thats what you want right?)
As @ShubhS9 mentioned earlier you might have to bring in 50:50 cash:equity since the short CE is going overnight
My reply may not help you get the exact text book margin benefit, but it still works.
@viswaram I appreciate your effort but that do not actually help practically. All you can get done is reduce margin by funding with pledged money from equity holdings. Although this is obvious workaround anyone would take, in larger picture this do not help retail trader or even broker or exchange.
Let me explain, when we buy position with pledged shares, we essentially are risking shares unnecessary for small profits. Note that shares in such cases are not just risk by market fluctuations but also if market goes haywire, it can cause loss of shares + interest charge on pledged shares which also risks brokers.
Another thing to point out is if broker like Zerodha allows what NSE allows in its policy, we will have span margin waved off and will required very less exposure margin which will encourage people to buy shares and take positions against it. Such trades are always hedges and have less systematic risk than naked speculations. So less of risk for broker too.
I really appreciate your suggestion @viswaram and thank you for your input but we need to have proper margin discounting to help build better trading and investor community.
Such community is only way brokers can have edge over one another.
I hope Zerodha understands this, it is clear against their own interest to disallow such margin discounting. People loose money and exit their trading journey faster this way. And it is upto them to addess it. Exchange do not seem to block this margin discounting.
Adding to what @viswaram pointed currently, exchange offering cross margin benefit is not straight forward operationally since broker has to upload the files with necessary details. Also, even if broker wants to offer this facility, they need to full fill the below mentioned clearing and settlement criteria and the current criteria’s doesn’t look easy as we speak.
The spread benefit is only passed for Futures and not for Options. Also, portfolio with hedge benefit or calendar spread will not get cross margin benefit as the portfolio is already covered for risk.
Portfolio should be exact replica that means no. of shares in the holdings should be equal to the lot size and no partial benefit.
No clarity on corporate actions like Bonus issue, merger which impact F&O lot size. Because Bonus shares or merged entity (if not listed) will come much later than the F&O lot size impact on ex-date. Also, no clarity on F&O having periodical review (every 6 months once) of lot size whenever contract size increase/drops beyond the exchange stipulated criteria.
In case of Physical delivery, you will have give delivery position (short against holdings) and failed to sqroff or roll over would debit your shares towards to the obligation. Again no clarity on how the delivery margin, etc. are applicable since Peak, physical delivery are introduced in last 3-4 yrs compare to cross margin feature.
There will be some more points which I might have missed. Having said that, we appreciate your feedback and may give a try in future.
You will have to maintain full SPAN + Exposure margin for shorting futures contract. Holding underlying shares doesn’t give any margin benefit. You can check margin requirements here: F&O margin calculator - Zerodha Margin Calculator
Hello Bhushan,
I am unable to find any information on margin requirement/pledging of shares for a covered call.
my understanding aligns with you regarding the strategy,
Did you manage to create covered call against your holdings in Zerodha?
please reply.
and may give a try in future.