Hedging Logic's

Have a general question in regards to hedging ,
Please consider the following situation
Monday : Bought Bank nifty Future at 21000
hedge : bought bank nifty 21000 PE at 300 rupees ( ATM PUT) ( weekly expiry )

both trades kindly consider single lot , margin charged by zerodha for this trade is around 16000-22000
Kindly consider i have this margin .

Tuesday : banknifty gaps down by 2500 points

I have always noticed that Deep ITM PUT always trades a few minutes later after the market opens
They don’t start trading immediately like the futures
The reason being a huge Gap between BID and ASK …
After ten or fifteen minutes this settles down and starts trading until then they display only LTP price of previous day

my question : will zerodha cut my futures position since i don’t have enough margin for a gap of 2500 points

and since the Put which i had bought has not started trading yet and is still displaying only LTP of yesterday

or will zerodha’s algo understand that i am Holding ATM put and continue to hold my position

kindly clarify my question

thank you in advance

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If there is a gap down of 2500 points (then BANKNIFTY is at 18500) there is a loss of 62500 in futures . 21000PE will be trading around 2400 to 2800 . So your maximum loss can be 7500 .

So you need to have 7500 apart from margin . Suppose if you have only 6500 , then your position will stay as is, but your account will result in negative balance of -1k, which you will have to add to your account or you will be charged interest of 0.05% on debit balance.

Dear Sir ,

Thank you for taking time to answer my question ,

i Really appreciate it .

Sir jus for clarity sake i am asking you this again …

irrespective of whether the puts starts trading immediately or starts trading a little late

DEEP ITM PUTS trade a little later may be ten or fifteen minutes due to difference in BID AND ASK

Zerodha will not CUT my position right since i am holding AN ATM Put ?

i just wanted to understand how zerodha algo works ,

since there is a loss in future and no profit in put will it cut my position

or will the zerodhas algo be able to understand that i am holding an atm put and not cut my position

thx again sir

No worries . Even though if it trades 10 to 15 min late your position will not be squared off . You will still have your position . Even though if you don’t have put option as hedge your position will still be there but it shows -60k as your margin available (negative balance) . Zerodha will never automatically square off position (will never square off your position on their own ) unless it is a MIS order and the time is 3:15 . Suppose if your margin shows -60k and you still don’t add any funds then , then you will be charged 0.05% on net debit . If you avoid paying they have right to take action against you . @ShubhS9 please correct me if I am wrong .

Sir are you sure ? of what your saying

If i don’t have a Put option and still my Futures position is in loss wont zerodha cut my position

Due to lack of funds ?

Sir to my understanding every broker has an RMS ( risk management system )

just to do this job

Sir wont it become a risk for them if i fail to pay that difference amount

If someone from zerodha could join in this conversation can clarify it would be of great help …

Sir is there a way to ask this to zerodha directly ?

thx again sir for spending your valuable time

According to my knowledge they wont square off . Anyways let the members give you clarity
@ShubhS9 @siva @nithin @Bhuvan Can anyone of you give clarity about this

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Right, won’t be closed unilaterally but you should have required margin to carry for next day if not you will levied exchange penalty so they may close both put and futures.

Thank you siva sir

yes i will have sufficient margin money but not 2500 points …

But the Deep ITM PUTS that i would be holding will trade a little late due to bid and ask difference

but there will be losses in the future upto 2500 points according to the scenario … what happens then ?

my understanding towards the whole thing is that ( i might be wrong too so someone kindly clarify ) risk management comes into place when a trader

runs into losses very close to the margin he holds at that point in time the algo will cut the positions

automatically due to insufficient funds cause the broker cannot suffer the losses for the trader i guess

this called margin calls ( again i might be completely wrong so pls clarify )

in this scenario i have enough margin to carry over night i have an ATM PUT as an hedge

the only issue is ONCE the ATM PUT becomes Deep ITM PUT it does not trade as instantly as a future

in that case i will have loses in the future more than the margin money i will be having in my account and my

Put will be trading at yesterdays LTP until the BID AND ASK settles down

so was jusy wondering if zerodha will cut my position automatically @nithin

thx again to @Adityadd and @ShubhS9

The profits you make from long option positions don’t get settled on a daily basis like in case of futures. So even if you had that notional gain from options, it can’t be used for setting off the losses from the futures position. While we might allow you to continue holding, but you will have to pay exchange penalty if the margin after reducing the loss isn’t sufficient.



Is same true for vertical spreads?
Does here also margin calculated only as per the losses of short leg only?

Options don’t have m2m, for longs you might have already paid premium in full upfront but for short there can be change in span+exposure but this will not be much, so vertical spreads should be okay.

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thank you sir @nit

Thank you Siva.
But this adds to my confusion.

Last thursday due to huge down move my short PEs were in huge loss while Long PEs in proportional profits.
Still kite started gobbling up all the margin and I was in net margin shortfall!!

Only one thing is clear until now - that zerodha wont sq off positions even if margin shortfall is shown in kite.
But other issues remain.

  1. As spread position has used all the margins, trader wont be able to take new position.
  2. If I do not sq off. What will happen after market closure. Will all negative margin calculation be wiped out, and margin utilized is reset as per exchange s+e margins, thus releasing all the margin back?

If full margin is used then how can one take other position?


And at next day open?
If market opens at same levels my losses in short leg will remain same.
So Again margin shortfall will be calculated as soon as market opens, Right?

Based on span+exposure, it can increase or decrease based on volatility along with level.

Sorry to bother again, but

I had 20 lakh initial margin.
My spread span+exp utilized 10 L.
My free available margin was 10L.

But next day as market moved unfavorably, my short leg loss became -10L and long leg profit 9L.
Now as per you long leg profits are not considered, so forget that.
But as my short leg loss is -10L, is it reduced from the available margin (10L), leaving me no 0 margin.
So for the whole day I cannot take new trade.
At Eod you said everything in margins is reset. But here lies further issues.

My initial margin for this spread was 10 L. And my account had 20 L, leaving me 10 L free.
But now my 10 L is blocked in Loss of short leg. Right?
So if new Span+Exp margin calculated turns out to be 12 L, Will zerodha show utilized margin as 12 L and frees my 8 Lakh margin? Or as my short position is still in place, its 10 L loss remains blocked. So now my margin requirement for open position is 12 L and margin available is just 10 lakh.
So basically

Opening Margin - 20L
margin blocked for loss making short leg = 10L
New Sapn+exp = 12 Lkah

I am in 2 Lakh shortfall.!!!

Right for that day, but for next day you will have 8 lakhs free with 12 lakhs blocking for margin. You can use that 8 lakhs for next day.

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Just like if I am correct.

  1. Although Margin shortfall is calculated and sms sent on the day of violent move ( day 1), no need to do anything. No need to add margins. You wont square off. even if short fall is in lakhs.

  2. Next day even though position book is showing huge losses in short leg, it wont get reflected in margins like yesterday. So my margin is released back.

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Right, only in case if loss is in option short and having enough span+exposure.

Right, same scenario as above.