Suppose someone sells an ITM call option 1 day before expiry by paying the required upfront margin and carries the position to the next day. Also, he carries just enough money in the account to sell the ITM option.
On expiry day, margin requirements increase. And as he has no extra money in his account, his margin requirement will show negative.
Now my question is, in the above case, will the person incur a margin penalty?
Another question: Will the penalty be given if the margin prices increase because of an increase in volatility, in case of no extra money in the account?
Normally broker RMS might square off this position on expiry day at open, if not, yes, user will incur margin penalty.
Increase in margin won’t happen during the day but can happen for next day, in this case also same, RMS might square off your position for insufficient balance if not you will be penalised.
Normally broker RMS might square off this position on expiry day at open, if not, yes, user will incur margin penalty.
So the user could have to pay a penalty in case positions aren’t closed by RMS. But isn’t the user fulfilling the upfront margin requirement ?
Just to be safe, how much extra margin is generally required for expiry day compared to E-1?
Also, is there any time limit to put funds in order to prevent this margin penalty?
Yes, but on expiry day According to regulations starting 20th November 2024, an additional 2% [Extreme Loss Margin (ELM) will be levied on all short (sold) index option contracts on their expiry day. This margin will be charged regardless of whether the position is intraday or overnight, and it will also apply even if the position is hedged.
2% extra of contract value, so at nifty 24k that would be 36k per lot.
@siva thanks for clarification. Based on experience I have observed that zerodha RMS is closing the position at 9:20. Hope there will be no penalty if RMS closes at 9:20, please confirm?