MTM Margin calculations in options spreads

I have Bull Put Spread which is Deep ITM now and hence in loss.
I observed today that as market continued to fell, and as my loss in sold PE increased gradually ( profit in Long PE also increased proportionally), Zerodha started blocking more and more margins.
In the past I have been mostly able to avoid such large move days and haven’t experienced this before.
So even though net PnL for spread remained constant my Margins kept increasing.

  1. Why? Mechanism explaination plz.

2, What will happen if I went into Margin Shortfall due to continuous one sided move ?

  1. What is zerodha policy here? You square off?

  2. What does new SEBI rules tell us.

@siva @ShubhS9 @nithin

@maddy_Des

Here is the policy followed for the Hedge positions.

  1. Mtom will always be calculated on derivatives open positions especially when you carry forward options short positions which will act as the future position where Mtom will be calculated for the losses & for the Long positions profit will not be considered for the margin utilization until it is closed, The same mechanism works for Hedge or Naked positions.

  2. Since your position is hedge it will not have any impact on margin shortfall since Mtom will not be considered for options short position.

  3. We follow exchange policy if a client has a hedge position, the risk is limited & sufficient margin maintained towards the exchange margin required ( SPAN +EXPOSURE) we don’t reduce the position as long it is hedged.

  4. With the new margin frame rule from SEBI, it gives margin benefit towards hedge positions.

As long as your short position is on the safer side, you don’t have to worry about margins. But what I have noticed is , once you short options MTM loss is more than 100% of the credit you received, the margin required for that position starts increasing.

If you went into Margin shortfall, you will get mail and msg at the same time from Zerodha. They may square off your position if you don’t pump up more margin or liquidate your position. It is pain, really the most worst thing that can happen. I have talked to 3 brokers about the same, it is a simple logic, if your position is hedged, you will lose nothing but your max loss. But still all the brokers will ask for additional margin. Its not only Zerodha, but all. Because it is SEBI’s rule. I don’t exactly know what SEBI’s rule tell us.

@ShubhS9 can explain it in better way

SEBI reduces margins for the hedged positions, but at the same time it wants us to have enough liquidity. There should be one single order that can execute both original and hedged options, only then this issue can be resolved.

1 Like

Still confused.
Your first statement and second seems contradictory .

  1. Losses from Short positions will be used for margin calculations but profits will not be considered while calculating MTM margin. Right?

  2. So if I have full margin utilized while entering spread, & market moved against my short leg, & my short leg started showing 5 lakh losses while my long leg started showing 4 lakhs profit, net loss being 1 lakh - still Margin utilized will add up that 5 lakh loss showing huge shortfall while 4 lakh profits in buy leg wont be considered.

  3. As per your second statement even i9f my Funds are showing huge shortfall of -5 lakhs, my positions wont be squared off by RMS for margin shortfall as they are hedged positions. And I am not required to bring in extra margins to avoid square off.

Thanks.

@Sam @siva

Plz spare a minute or two to clear my doubts.

Won’t zerodha square off my positions if my Spread goes into deep ITM, Shorts are accumulating huge losses, and although net loss is pretty much constant my available margins have gone in -ve territory by lakhs.

Is not happening, Mtom is being considered in my Bull PUT spread , margin keeps on changing!! and i too have the same issue as mention by @maddy_Des

2 Likes

They said yesterday’s move was record breaking for any monthly expiry day. hence this issue surfaced.

My short put was in 20Lkah MTM loss and my long put in 19Lakh profits at one point in time.
And my whole margin was utilized gradually.

Just wanna know if RMS will square off positions in case of huge apparent shortfall? In case of non expiry day and RMS wont square off, will there be shortfall for overnight and hence penalty?

Eagerly waiting for answers.

@maddy_Des

The current mechanism of Mtom calculation works based on the following methods.

If a naked short/long position in futures/ Option short mtom losses will be part of the margin used based on the previous close price.

Futures settlement happens daily basis, based on the profit/loss Mtom will be adjusted on the account.

Whereas in option short there is no Mtom calculation for the day unless the position is closed, the amount of buy value will be adjusted to the account.

For options, the short margin will be increased/ decreased based on the strike to the current ltp.

If the option is OTM when trade was executed but the market goes against your position & turns in the money, the margin requirement increases gradually based on the strike.

As per your concern on the Hedge position where Mtom of short position will be always part of the margin used whereas long options Mtom will not be part of it for the carry forward positions.

As part of risk management, we do consider long options value for the hedge position since the risk is limited & as long as the position is hedge there will be no square off from our end.

2 Likes

These points are still not so clear ,It will be of very useful to one and all if it is explained with
examples in a detailed manner.

2 Likes

@Sam Please clear do you mean to say the following ??
1.) Margins will keep on increasing in case of ‘Bull Put Spread’ going deep ITM,
2.) But the positions will not be squared off,
3.) But we will have to face short margin penalty because M2M loss of short option will be considered but M2M profit of Long Option will not be considered.
Is my understanding correct ?

@Stonecold

1.) Margins will keep on increasing in case of ‘Bull Put Spread’ going deep ITM.
As long as the position is hedged, margin increment will not have any impact on your position.

2.) But the positions will not be squared off,
No position won’t be squared off until the hedge position is maintained.

3.) But we will have to face short margin penalty because M2M loss of short option will be considered but M2M profit of Long Option will not be considered.

Options Mtom will not be part of daily obligations for short/long positions.
So if the short position is making a loss of 10K & the long position is making a profit of Rs 8K, the margin used column will consist of Rs 10K because it calculates on the derivative max loss position in the portfolio.
Since your position is hedge it will not have an impact.

Hope this clarifies your doubt.

@Sam
1.) But penalty we will have to pay in case of Short margin in this case, right ?

2.) Second thing I want to know is suppose I have Margin money only and not real cash, then if I sold some option to receive premium of say 20k then can I buy an option using this 20k premium received ?

1.) But penalty we will have to pay in case of Short margin in this case, right ?
There won’t be any penalty unless your hedge position is broken.

2.) Second thing I want to know is suppose I have Margin money only and not real cash, then if I sold some option to receive premium of say 20k then can I buy an option using this 20k premium received ?
Yes, You can use the premium credit to buy the options only.

1 Like

And what about futures, can we buy/sell futures also using received option premium ?

Options settlement happens on T+1 day basis, so futures / Equity trading is not allowed with premium credit for the day, only your allowed to trade in option buy/sell on the same day with premium credit.

@Sam
But here in the below thread @nithin is saying otherwise

Can you please tell me what exactly you are pointing out with that statement?

Sam said that no short margin penalty will be there in case of hedged position while Nithin sir is saying that there will be penalty in case of notional loss is not covered with extra margin or cash disregarding the fact if we have hedge or not.

If any future is involved then you need to adjust that m2m with cash, for options there will be no marking to market which means daily settling the loss with cash is not required but the margin required may go up after the position is initiated, so always need to maintain span+exposure.

Ah my bad. If the position is completely hedged it wouldn’t matter.