How does exiting long position exit trigger auto square-off of a short position?

Zerodha
1

Hi,

Here are the chain of events (all positions are on NIFTY):

  1. I held a long (naked call) position on Friday and carried over
  2. I did a new short strangle on Monday for Thursday expiry. I had enough margin and the order went through
  3. I retained all positions on Tuesday and didn’t exit any. Margins were fine.
  4. On Wednesday, I exited my long position which triggered a margin call SMS and which in-turn has triggered auto square-off some of my short positions in one leg of short-strangle

Question:

  1. Since premiums for long (naked call) position are already paid upfront, exiting long position should only impact paid premium and not additional margin?
  2. How exiting a long (naked call) position which has nothing to do with margin affect the short-strangle margin and triggered margin call SMS -> auto square-off one leg of short-strangle?
2

What should have happened is your Long Options position taken on Friday acted as hedge for one off your short positions in strangle, giving you margin benefit.

When you squared-off your Long Options position, hedge was removed as result of that margin requirement shot up and since you didn’t bring in required margins after getting margin call, your one short position resulted in auto square-off.

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3

Thanks Shubh, that makes sense.

Could you also help me with one follow up question: On Wednesday, you’re answer makes sense exiting long call triggered auto squared-off of 50% of short position (in one leg of short-strangle). But on Thursday, another 10% on the same leg was auto squared-off (No buy/sell from my side). What could be the reason for that?

4

Margins changes dynamically based on volatility /time so that could be the reason, for exact answer you can create ticket here.

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