Suppose I have shorted a near expiry put e.g. Nifty 23000 PE 2026 December expiry and I’ve gone long in the same strike put of farther expiry e.g. Nifty 23000 PE 2027 December expiry.
Theoretically, the downside is limited as long as I keep both the positions open. However since farther expiries are less liquid, I wanted to understand, what happens to the margin requirements if suppose the market has a big fall e.g. like during COVID and the near expiry put spikes up a lot but the father expiry option, due to less liquidity doesn’t get traded. So on zerodha, I would see a big notional loss…It could be a very big number. Would the margin requirement increase proportionally?
Another scenario: suppose I went long in 24000 PE and shorted 23000 PE, both of the same expiry. Now if the market goes down a lot, 24000 PE would be deep ITM which might make it less traded so its price might not get updated as frequently as the 23000 PE.
In both of these scenarios I want to understand if my positions might get liquidated just because my notional loss exceeded the theoretical Max loss by a lot due to liquidity issues.
Here, you don’t have a perfect hedge. The SPAN system calculates risk dynamically and treats calendar spreads as carrying significant risk because they do. If the market crashes, IV spikes, and your near-month and far-month puts react very differently. The exchange will increase your SPAN margin requirement as the market falls. If your account balance drops below the required margin, our RMS will step in and square off the position.
Since both legs expire on the same day, your long 24000 PE perfectly covers the short 23000 PE. The SPAN + Exposure margin blocked at entry already reflects your maximum possible risk. Even if the market falls and your long put goes deep In-The-Money (ITM). Showing a skewed Last Traded Price (LTP) due to illiquidity, the exchange’s pricing model still recognises that your short is fully covered.
There is a possibility of an increased margin requirement here as well, depending on how far away the expiry is. You simply need to maintain the required margin, regardless of the LTP. As long as you maintain the required SPAN + Exposure margin, we will not square off your position.
RMS doesn’t liquidate you just because an illiquid strike is showing a weird notional loss. Liquidation primarily happens when you fail to maintain the SPAN + Exposure margin required by the exchange. That said, as a standard risk management policy to protect against extreme tail-risk events, we may also liquidate your position if your MTM loss drops your overall account value by more than 50%. If you’re trading complex or calendar spreads, always keep a decent cash buffer in your account to handle sudden margin or volatility spikes.
