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.

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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

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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.

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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.

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