Last week margin requirements for covered calls on physically settled stock options

Say, I have 500 (which is equal to lot size) stocks of Reliance in my account and I sell a covered call on the same script at some OTM strike price. And, say, I also have the same amount of cash in my account that covers the margin for the calls sold.

Say, the option goes ITM near the expiry, and I, still, have the stocks in my account. Will the increase in margins (which Zerodha does in the last week of expiry) still be applicable to me?

If yes, will the shortfall in margin result in a charge of interest in my account or squaring off the position by RMS? If both things are possible, what are the scenarios in which one or the other may happen?

Yes.

Yes, it can result in both, best way is to close position on wednesday if not add more margin by wednesday.

By default all options are cash settled even the stocks options for example above covered calls?

No, all stock options are physically settled provided they are ITM.

Dear @siva, The increase in margin requirement seems to be arbitrary, decided by zerodha people for risk management, rather than mandated by sebi. I could reach this conclusion by frequent changes made by zerodha: last monthly expiry it was 100% of contract value, earlier it was 50%( of contract value).

  1. can u plz clarify otherwise(that indeed it is sebi MANDATED?)
  2. If not sebi mandated, why don’t u come with a solution for people selling covered calls: like “pledging/blocking” of shares till one exits the cover call.
    The reason is, people trying to earn safe-harmless pennies by selling covered calls are really burdened to keep the required cash balance to fulfill 50% of margin money…
    Exiting 2-3days prior to expiry is an option not lucrative many times due to lack of liquidity
    Thanks
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These are blocked by us, broker can choose the margins according to their risk management policies, can’t charge less than than mandated but can charge more.

We ask for more margins only on last 2 days, we can’t block shares as of now but will see what can be done in coming months.

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I think blocking stocks instead of asking higher margin is still not possible correct? just confirming.

Right.

The increase in margin requirement seems to be arbitrary, decided by zerodha people for risk management, rather than mandated by sebi. I could reach this conclusion by frequent changes made by zerodha: last monthly expiry it was 100% of contract value, earlier it was 50%( of contract value).

@siva Do you guys ask for margin equal to 100% of contract value on expiry day?

If yes, do you ask 100% for both calls and puts,
and even if the strike is otm?

On last wednesday and thursaday of last week it will double of normal span and exposure or 100% which ever is less.
It is always like that.

Yes, if it is short option we will ask double irrespective of moneyness, OTM can become ITM anytime.

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Hi @Siva,

Is there any way to calculate this margin requirement in the last week, I see the Zerodha margin calculator does show the margin requirement based on yesterday’s closing price. But Is there any way to calculate this margin well in advance? So that I plan my trade accordingly to maintain the balance?

Pavan Marla

You can check on order window or on basket itself. Also we get latest margin files on monday mornings. We charge double margins on wednesday and thursday only for futures and short options.

Hi Siva - what is the latest on blocking shares instead of asking for additional margin in last days before expiry?

As you can imagine it is a little frustrating for people who are writing covered calls.

thanks

Right, for now it stays that way but we are working out to address this.

Hi @siva,

Could you please explain what will happen in the below scenario

I hold 250 shares of Reliance (1 lot)
I sell Call Options for 2100 and the current price of the stock is 2000
To meet the margin requirement in the last week, I pledge my shares and I get extra margin.

  1. Do I need to have any additional margin apart from the margin that I get from pledging of shares?
  2. What If, the stock price moves up to 2200 on expiry and If i still hold the contract
    - Will the physical settlement happens through shares?
    - What happens to the Pledging, Are there any additional charges in this case?
    - Please explain if I’m missing any scenario that could cost me more.

Regards,
Pavan Marla.

If you are pledging the underlying stock, you cannot deliver unless you unpledge. And if you unpledge, there will be margin shortfall unless you meet margin requirement elsewhere. The bane of so called covered call.

Just when the poor lame man reaches for his crutch, there comes the devil, flying faster than a speeding bullet, to crush his only crutch and take his soul.

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I guess you are asking specifically for physical delivery and assume you are aware of minimum 50% margin should come from cash or cash collateral and another 50% from stock collateral.

So, for physical delivery irrespective of hedge or not for short options /futures double nrml margins is required.

As mentioned above if one has short option or futures double the margin is blocked irrespective of hedge or even if one holds shares in holding.
Pledge share are not considered as broker has no right to touch them and as it takes 1 day to unpledge one can’t use those share if unpledged on thursday.