New margin framework is here - to benefit hedged positions

16th May update
The changes in the margin framework will be effective from June 1st, 2020. Check this NSE circular.


This has been a long time coming — margin reduction for positions that hedge each other. SEBI has just put out the new margin framework for cash and F&O (Equity and currency) segments. Check this.

Here is how margin requirements will change

Cash market

No change in margins. Check below for Group 1 stocks.

Current New Change
Group 1
VAR 7.5% 9%
ELM 5% 3.50%
Total 12.50% 12.50% No change

Earlier there was no fixed VAR + ELM structure for Group 2 and 3 stocks. Now it is minimum 21.5% VAR and 3.5% exposure margin for group 2 and minimum 50% VAR and 3.5% exposure margin for Group 3.

So margins remain relatively the same for cash/stocks.

F&O (Equity & Index)

Check this doc.
These are just approximate margin requirements, we will put out our new margin calculator as soon as we get all details on this.

Highlights

  • Margin required is relatively the same for naked F&O positions.
  • Margin required for naked shorting of stock options seems to have gone up (double-checking this)
  • Margin required for positions which have limited risk drops by up to a whopping 70%.
  • Price scan range is now 6 Sigma vs earlier 3.5 Sigma (both for stocks and F&O). What this means is that if volatility picks up, margin increase will be higher than before.

I know some of you might have expected even lesser margin requirements for hedged positions, but as I have mentioned earlier - there are execution risks involved as well (client exiting the long options portion of the strategy and hence ending up holding the short positions with unlimited risk with very little margin). This new framework is a great starting point and hopefully as our markets mature the margin required for hedged positions go even lower from here.

Exchanges will most likely put out their circulars, and the new margins will most likely come into place from May 1st 2020.

So yeah, finally, trading Option strategies with the new lower margins will make business sense for all traders. This should hopefully get a new breed of traders to the markets. For all those who don’t know much about trading Option strategies, here is how you can get started:

31 Likes

Great news!

@nithin ,
Thanks for the update.
Alright , So primarily Iron Condor or Spread based strategies to benefit.

How about the Intraday leverage ?
Any clarity on that ?
Shortfall Penalty (based on Intraday monitoring) to be imposed from April 1 and Peak Margin utilisation reporting to start.

Nothing on that yet, exchanges need to give clarity on those, current circular is related to only margins for normal and hedged positions.

@nithin That’s a great news. Any Benefit for Calendar Spread like selling Monthly Option and Buying Weekly option?

1 Like

Guess another 1-2 months at least, for the Green signal and then implementation on ground level. :slightly_smiling_face:

@nithin so how much money i will need in account for bear call spread…25k only or 85k first and thereafter 60k will be credited back?

So there is no change in intraday margin for futures as of now
Correct?

Does this mean liquidity in stock options will increase?

Yes.

This is such a fantastic news. When is Zerodha implementing the new margin rules?

@nithin @siva any change in CDS margin ?

Ideally, it should.

Exchanges have to first put out the circulars, SEBI circular says May 1st though.

Hi…when will the margin calculator be updated ?

1 Like

What about strategies like Short Straddle and Strangle, will margin requirements go down for them as well… @siva @nithin

Price scan range is now 6 sigma for CDS(previously 3.5 sigma), however, the exposure margin has been reduced in half, so you will see a very slight increase in margins.
For USDINR, the minimum SPAN has been raised from 1% to 1.5% of the contract value and exposure reduced from 1% to 0.5%.
In low volatility days, the margins will be almost the same as now.

3 Likes

Hi @nithin.
Thanks for the update. Will you please also clarify about the margin impact on Short straddle /Strangle?
Waiting for your reply.

Thanks,
Ashish K

Dear @Nithin
Can you plz point towards the portion in the circular from where you deduced this margin reduction?
I read the whole pdf but could find the hedged positions mentioned nowhere. There is only mention on “calendar spreads”!

TIA

@nithin @siva

Any update on margin for shorting monthly options and hedging with weeklies??
Many traders use this strategy??