Hi everyone,
This post aims to address the confusion surrounding net obligation. Many of you have expressed your confusion about how net obligation works, even when you are in profit (“Why is my obligation in debit?”), and many other questions. I will try to cover as many possible examples as I can to help you understand net obligation.
Please note that in our examples, we have assumed a constant value of Rs 50 for charges, which includes brokerage and other charges. However, in real trades, these charges may vary depending on the premiums. We have kept each buy and sell order charges as Rs 50 to simplify the calculations.
In reality, the charges may vary depending on the brokerage, the type of order, and the amount of money involved. It is important to check your list of charges to know the exact charges before placing an order, you can also use a brokerage calculator.
We will begin with simple examples and then progress to more complex cases involving multiple positions.
Example 1
Let’s start with the first example.
On April 1, 2023, we have an opening cash balance of Rs 10,000. On the same day, we buy one Nifty 19400 call option contract at a price of Rs 100. One lot of this option contract consists of 50 quantities, so the total cost of the contract is Rs 5000. We also assume a total charge of Rs 50 for the trade.
Therefore, our closing balance on April 1, 2023 will be Rs 4950, calculated as follows:
Opening balance = Rs 10,000
Cost of Nifty 19400 call option contract = Rs 5000
Total charges = Rs 50
Net Obligation is Rs 5050/-
Closing balance = 10000 - 5000 - 50 = 4950/-
If we exit this position on April 2, 2023 at a price of Rs 200, our balance will be Rs 14,900, calculated as follows:
Opening balance on 2nd April = Rs 4950
Exit Nifty 19400 call option contract = Rs 200 (200*50=10000 included profit of Rs 5000)
Total charges = Rs 50
Net Obligation is Rs 9950/- (=10000-50)
Closing balance for 2nd April 2023 = 4950 + 9950 = 14900
Profit on the trade = (200 - 100) x 50 = Rs 5000
Example 2
Let’s move on to the second example. In this example, we have taken an intraday trade in an options contract. On April 3, 2023, we have an opening cash balance of Rs 20,000. We buy one SBI 400 Put option contract at a premium of Rs 10. One lot of this option contract consists of 1500 quantities, so the total cost of the contract is Rs15000. We also assume a total charge of Rs 100 for the trade.
We then sell the same contract at a price of Rs 15. Therefore, our profit on the trade is (15 - 10) x 1500 = Rs 7500
Our closing balance will be Rs 27,400, calculated as follows:
Opening balance = Rs 20,000
Buy SBI 400 Put option contract = Rs 15000
Sell the contract at Rs 22500 (=15*1500)
Total charges = Rs 100
Profit on the trade = Rs 7500
Net Obligation is Rs 7400 (=7500-100)
Closing balance = 20000 + 7400 = 27400
Example 3
In this third example, we have taken two trades: one is an intraday trade and the other is a buy position that we are carrying forward to the next day.
On April 5, 2023, we have an opening cash balance of Rs 20,000. We take a trade in the Nifty Call option 19000 at a premium of Rs 100. One lot of this option contract consists of 50 quantities, so the total cost of the contract is Rs 5000. We then sell the same contract at a price of Rs 150. Therefore, our profit on the trade is (150 - 100) x 50 = Rs 2500.
The total charges for the trade are Rs 100.
On the same day, we also buy one option Put Strike Nifty 18900 at a premium of Rs 80. One lot of this option contract consists of 50 quantities, so the total cost of the contract is Rs 4000. The total charges for this trade are Rs 50.
Therefore, our closing balance for April 5, 2023 will be Rs 18,350, calculated as follows:
Opening balance = Rs 20,000
Cost of Nifty Call option 19000 contract = Rs 5000
Sold the same call at Rs 7500 (included profit of Rs 2500)
Total charges for the trade = Rs 100
Cost of Nifty Put option Strike 18900 contract = Rs 4000
Total charges for the trade = Rs 50
Net Obligation is Rs = -1650(=2500-100-4000-50)
Closing balance = 20000 – 1650 = 18350
In our last example, we had a debit net obligation even though we were in profit. This is because we bought a position that was more expensive than the profit we made from the intraday trade.
On April 6, 2023, we have an opening cash balance of Rs 18,350. We have one open position, which is the Nifty 18900 Put option contract that we bought on April 5, 2023. We exit this position on April 6, 2023 at a price of Rs 100. One lot of this option contract consists of 50 quantities, so the total premium of the contract is Rs 5000. The total charges for the trade are Rs 50.
Therefore, our closing balance for April 6, 2023 will be Rs 23,250, calculated as follows:
Opening balance = Rs 18350
Cost of Nifty Put option Strike 18900 contract = Rs 5000
Total charges for the trade = Rs 50
Net obligation is Rs 4950 (=5000-50)
Closing balance = 18350 +4950 = 23300
Example 4
In this fourth example, we are buying an option on April 7, 2023. Our opening cash balance is Rs 20,000. We buy one Nifty 19200 Put option contract at a premium of Rs 50. One lot of this option contract consists of 50 quantities, so the total cost of the contract is Rs 2500. The total charges for the trade are Rs 50.
Therefore, our closing balance for April 7, 2023 will be Rs 17,450, calculated as follows:
Opening balance = Rs 20,000
Cost of Nifty 19200 Put option contract = Rs 2500
Total charges for the trade = Rs 50
Net Obligation is Rs = 2550
Closing balance = 20000 - 2550 = 17450
On April 8, 2023, we exit this position at a price of Rs 100. Therefore, our profit on the trade is (100 - 50) x 50 = Rs 2500.
We also buy one Nifty 19400 Put option contract at a premium of Rs 120. One lot of this option contract consists of 50 quantities, so the total cost of the contract is Rs 6000. The total charges for this trade are Rs 100.
Therefore, our closing balance for April 8, 2023 will be Rs 16,350, calculated as follows:
Profit on the Nifty 19200 Put option trade = Rs 2500
Cost of Nifty 19400 Put option contract = Rs 6000
Total charges for the trade = Rs 100
Net Obligation is Rs = -3600 (=2500-6000-100)
Closing balance = 17450 - 3600 = 16350
On April 9, 2023, we exit the Nifty 19400 Put option contract that we bought on April 8, 2023 at a price of Rs 100. One lot of this option contract consists of 50 quantities, so the total amount of the contract is Rs 5000. The total charges for the trade are Rs 50.
Therefore, our closing balance for April 9, 2023 will be Rs 21,350, calculated as follows:
Sold Nifty 19400 Put option contract = Rs 5000
Total charges for the trade = Rs 50
Net Obligation = 4950 (=5000-50)
Closing balance = 16350 + 5000 - 50 = 21300
Example 5
In our fifth example, we will start learning about options selling net obligation settlement. But before we start with the cases, we should be aware of margins. When we sell options, we receive the premium, but on the other hand, Span and exposure margins are blocked. These margins will be released once we exit from the trade.
Standard Portfolio Analysis of Risk (SPAN) is a risk management tool used by exchanges to calculate the margin requirements for futures and options (F&O) contracts. SPAN takes into account the price and volatility of the underlying security, as well as other factors, to determine the maximum possible loss for a portfolio. The margin requirement is then calculated based on this maximum loss.
Exposure margin is an additional margin requirement that is charged by exchanges over and above the SPAN margin. Exposure margin is used to cover risks that the SPAN margin may not cover, such as the risk of gapping.
Gapping is a situation where the price of an asset moves sharply up or down in a short period of time. This can happen due to a sudden change in market conditions, such as a news event. The SPAN margin may not be sufficient to cover the losses that can occur due to a gap, so exposure margin is used to provide additional protection.
You can learn more about Span and exposure margin here.
Let’s begin with an example. Suppose on April 15, 2023, we have a cash balance of Rs 200,000 in our account. On the same day, we enter into a new trade of selling a Nifty 19500 call option at a premium of Rs 100. One lot of this option contract consists of 50 quantities, so the total premium received is Rs 5000. The total charges for the trade are Rs 50.
The margin that will be blocked on the same day is Rs 120,000. This includes Rs 100,000 as Span margin and Rs 20,000 as exposure margin.
The net obligation on the trade is Rs 4,950, calculated as follows:
Total premium received = Rs 5000
Total charges for the trade = Rs 50
Span margin = Rs 100,000
Exposure margin = Rs 20,000
Margin Blocked is Rs 120000
Net obligation = 5000 - 50 - = 4950
Closing balance on 15th April 2023 is Rs 84,950/-
On April 16, 2023, we buy back the contract at a premium of Rs 10. The total charges for the trade are Rs 50. The margin that was blocked on April 15, 2023 will be released. We also have to pay the premium back to the exchange at Rs 10 for 50 quantities, which is Rs 500.
The profit on the trade is Rs 4500, calculated as follows:
Premium received on April 15, 2023 = Rs 5000
Premium paid on April 16, 2023 = Rs 500 (50*10)
Total charges for the trade = Rs 50
Profit = 5000 - 500 - 50 = 4450
In this case, the margin that is released will be Rs 1,20,000. Also the Net obligation will settle this is calculated as follows:
Net obligation = Rs -550 (500+50)
Margin released Rs 1,20,000
The closing balance will be Rs 2,04,400 (84950+120000-500-50)
Net Profit made in the trade is Rs 4400 (5000-500-50-50)
Although we made a profit in the above example, our account shows a debit balance on April 16, 2023, rather than a credit for the profit. This is because we had already received the premium from the exchange on April 15, 2023.
Example 6
In this sixth example, we will learn about a case where we have done one intraday trade and carried forward one short position.
Suppose that we have Rs 200,000 in our account on April 20, 2023. We shorted two lots of Nifty 19000 Put option at Rs 200. The margin blocked for the trade is Rs 160,000, of which Rs 120,000 is Span and Rs 40,000 is exposure.
On the same day, if the option premium falls to Rs 100, we exit one lot and carry forward the other lot for the next day. The next day, the contract expires worthless.
On 20th April 2023
Opening Balance = Rs 200000
Margin blocked = Rs 80,000
Charges paid = Rs 100
Premium Received = Rs 10,000 (200*50)
Intraday Profit = Rs 5000 (50*100)
Net obligation = Rs 14,900
Closing Balance = Rs 1,34,900 (200000-80000-100+10000+5000)
On April 21, 2023, our margin will be released by the broker. The closing balance will be Rs 214,900, calculated as follows:
Margin released for one lot = Rs 80,000
Premium paid = Rs 0
Net obligation = Rs 0
Closing balance = 1,34,900 + 80,000 = 2,14,900
Example 7
In this seventh example, we will try to cover a case where we are selling one strike and buying another option in the same series and carrying forward the position for the next day.
On April 23, 2023, we have a margin of Rs 200,000. We sell one Nifty 19100 call option at a premium of Rs 100 and buy one Nifty 19300 call option at a premium of Rs 40. This is a spread trade, also known as a bear call spread.
The margin blocked for the trade is Rs 60,000, of which Rs 50,000 is Span margin and Rs 10,000 is exposure margin. We also paid charges of Rs 100 for the trade.
On 23rd April 2023,
Opening Balance = Rs 2,00,000
Margin Blocked = Rs 60000
Charges Paid 100
Premium received from Nifty 19100 = Rs 100
Premium paid for Nifty 19300 = Rs 40
Net premium = Rs 3000 = (100-40)*50
Net obligation = Rs 2900 (3000-100)
Closing balance = Rs 1,42,900 (200000-60000-100+3000)
On April 24, 2023, we exit the trade by buying the Nifty 19100 call option at Rs 40 and selling the Nifty 19300 call option at Rs 5. We also paid charges of Rs 100 for the trade.
In this trade, we made a profit of Rs 60 on the Nifty 19100 call option and a loss of Rs 35 on the Nifty 19300 call option. In total, we made a profit of Rs 1250.
Our closing balance will be Rs 2,01,050, calculated as follows:
Total margin released = Rs 60,000
Profit on Nifty 19100 call = Rs 3000
Loss on Nifty 19300 call = Rs 1750
Charges paid = Rs 100
Premium paid = Rs 2000
Premium received = Rs 250
Net obligation = Rs -1750
Closing balance = 201050 (142900+60000-1750-100)
Net profit = Rs 1050(1250-100-100)
Example 8
In this last example of options on April 27, 2023, we will consider all the possible trades.
Suppose that we have an opening balance of Rs 200,000 in our account on the same day. We created a total of 3 trades: * Buy 1 lot of Nifty 19000 call at Rs 200. * Sell 1 lot of Nifty 19100 call at Rs 150. * Intraday, we buy 1 lot of Nifty 19200 call at Rs 100 and sell it at Rs 50.
The margin blocked for the trade is Rs 130,000, of which Rs 100,000 is blocked for Span and Rs 30,000 is blocked for exposure. We also paid charges of Rs 200 for the trade.
The net premium paid is Rs 10,000(50200) and the net premium received is Rs 7500(15050). In the intraday trade, we booked a loss of Rs 2500.
Our closing balance for April 27, 2023 is Rs 64,800, calculated as follows:
Total margin blocked = Rs 130,000
Net premium paid = Rs 10,000 (200*50)
Net premium received = Rs 7500 (150*50)
Loss in intraday trade = Rs 2500 (50*50)
Charges paid = Rs 200
Net obligation = Rs -5000 (-10000-2500+7500)
Closing balance = 200000 – 130000 – 5000 – 200 = 64800
On April 28, 2023, we exited from the carry forward positions. We exited the Nifty 19000 call option at a premium of Rs 100 and the Nifty 19100 call option at Rs 75. We also paid charges of Rs 100 for the trade.
The margin that was blocked for these positions is released, which is Rs 130,000. Our closing balance is Rs 1,95,950, calculated as follows:
Opening balance = Rs 64,800
Margin released = Rs 1,30,000
Premium paid = Rs 3750
Premium received = Rs 5000
Charges = Rs 100
Net obligation = Rs 1250 (5000-3750)
Closing balance = Rs 1,95,950 (64800+1,30,000+1250-100)
I hope this post has been insightful and has helped you to understand the net obligation better.
Please note: The net obligation calculation in our examples does not include charges. In reality, charges (brokerage, STT, SEBI fees, GST & other charges.) are included in the net obligation.
Thank You