No sense or No logic to restrict Option buying with pledged share margin

I really don’t understand what makes requlator not allowing to buy options with pledged shares margin?

Not even for intraday!

When regulator can put restrictions on short selling but does not want option buying with pledged share margin?

Can anyone help me with this restriction, because I am completely unable to digest this rule or law.

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What if your options become worthless. Do you want your holdings to be liquidated.

Great but do option buying happens worthless everyday?

It should be then just restricted on specific expiry day contracts.

Why to restrict on entire option buying?

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Are you new to options? if yes then maybe you should read varsity options module here before trading.

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@siva Thank you so much!

But if possible can you explain why option buying is not allowed via pledged share margin?

Or atleast can you refer me exact link or content under entire varsity topics.

@siva I am trading from past 7 yrs and a professional trader from last 3 years in all segments.

But Never explore option leverage products in detail but now I m interested so I came across this “pledge against shares margin” features

& Was thinking how it can be used in option buying that to only for intraday

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Its a sad fact that regulators in India only come up with dumb , nonsense restriction in order to prevent retail traders from thriving in a proper way. Thats what they have been always doing. Making life of a retail trader miserable in every way possible.

Any proper way retailer find way to make a income in the market the regulators will immediately come up with all nonsense made up stories that doesn’t even apply to most retailers and will put a ban on something or the other. Its a depressing scenario actually. Every aspect of markets they have a ban or some restriction for retailers.

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@Gautam I completely understand your point.

But enough been theoretical

Leverage is add on feature which can be utilised with proper risk management (it’s similar to school topic I.e science & technology are boon or curse?)

Entire finance industry runs on leverage…so no need of blah blah knowledge about this.

The point is clear why pledged share margin allowed for option writing and not for option buying?

If you can explain this I would be more than happy and would thank you!

@Gautam don’t take it personal.

Thank you for your kind reply and surely if possible will try and write mail to SEBI for the same.

:smile:

U took it too personal :joy::joy:

When you buy Options, you are actually paying cash and this cash is credited to the writer of the option.

For eg: When you buy Reliance options worth Rs.15,000, it results in a cash outflow of 15,000 which is credited to the writer of the option.

However when you trade Futures, only margins are blocked. So if you sell one lot of Nifty, the Exchange levies margin on your account and similar margins are levied on the buyer’s account also. There is no ‘cash outflow’ to the trader.

When you pledge your stocks with a broker who inturn pledged it with the Clearing Corporation, you get margins and not ‘cash’. So you cannot buy Options because as mentioned earlier you’d have to pay cash to the writer of the option. Since the broker only gives you margins, you can utilize such margins only to take Futures/Short option position. If a broker allows you to buy options from collateral margins (even intraday), he is funding your purchase.

Note: Difference between margins and cash is, that margins are trading limits, while cash is your actual cash balance which can be withdrawn.

Assume your trading limits are set as Rs.4,15,000/- , out of this your cash component can be only Rs.1,15,000/- The remaining Rs.3,00,000/- could be Collateral margins. You could buy options only for Rs.1,15,000.

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@VenuMadhav Thank you for such detail explanation.

So Futures and options writing are not actually real cash transaction (but margin transaction) & Option buying is only real cash transaction (because real cash required) but entire F&O segment is considered as Non speculative as per taxation, it does not discriminate option buying as something else.

& after your explanation I feel - futures and options writing should be considered as speculative transactions atleast for taxation.

Do Margin means - Money but without cash?
(so pledged share margin is a Money without real cash for buying)

A real asset is pledged against unreal money (margin) - As this money is not allowed to buy.

Money & Cash have two different meaning?

When it’s about intraday then why not to hold margin money for buying and if by any reason client wants to convert this to CNC then surely ask for entire Premium amount as Cash or just square off the position as per cut off.

After square off any deficit EOD MTM then collect from client similar to futures and option writing & charge interest of 0.05% per day if unable to collect MTM deficit?

One main thing with options is premium can become zero in one day, suppose you have 1 lakh worth stock, after haircut you got 90k as collateral. Imagine if you bought options on expiry day worth of 90k, it can easily become zero, and at same time if pledged stock has fallen 20%, the risk of client losing more money than what he pledged is immense, this can result in major defaults and can result in systemic risk.

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Ahh sorry to say everytime z mentions that if stocks falls 20% and more,

This can result in major default and can result in systemic risk

Everytime how often does stocks move 20% and more in normal days ??

Zerodha gives excuses everytime for leverages margins of stocks , futures etc

I know leverage for options buying doesnt make sense :pray:

Then just stop only expiry contract to buy on expiry day rather stopping entire process for option buying.

It’s not 100% guarantee that only option writer makes money or can’t lose entire capital on expiry day or entire 1lakh as per your example.

Let’s test one hypothetical example for expiry and test what is more risky option buying or option selling with pledged share margin

XYZ 100 quantity currently trading price @ 100rs pledged with an haircut 10% so margin received 90000rs.

Same XYZ 100 strike price Call @ 5 rs with lot size of 100 quantity.

A) Option buying require = premium amount

B) Option writing require = approx 100 (current price ) *100 (lot size) @ 15% (Span + Exposure) = 1500rs - premium received

Let’s start the trade

  1. Option Buying Call 100 strike price @ 5rs

90000 (pledged margin) ÷ 5rs comes to 18000 quantity i.e 180 lots

Outcome
If on expiry day stock closes at 80rs then 90000rs becomes 0 and pledge share value becomes 80000/-

If liquidated at 80*100 = 80000 rs still 10000 rs chance of default by client.

  1. Option Writing Call 100 strike price @ 5rs

Margin required (refer point B above)

1500 - (5*100 lot size) = 1000/- per lot required for option writing.

Now with 90000÷1000 = 90 lots (approx) I.e 9000 quantity can be done option writing.

Outcome
If on expiry day stock closes at 120rs then 90000 option writing becomes -135000 and pledge share value becomes 120000.

If liquidated at 120*100 = 120000 rs still 15000 rs chance of default by client.

What is more Risky to broker interms of default option buying or option writing on expiry day?

You have witnessed this many times in last one month. Yes, this is not often but most optimistically let’s take it can happen once in 100 days, point is not to be screwed that one day because it can result in total damage to every participant.

Even on other days , 1L can become 10k/20k.
Quite a regular event in weekly options .

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That’s what anything can happen next day to option buying and even option writing price .

Things can still managed atleast for intraday then why only pledged share margin available only for option writing for delivery and as well as intraday & option buying is completely not allowed?

Bro if you are this much concerned about collateral margin for doing things like buy options just take loan against shares from NBFC , pay interest and do whatever you want, spend it , save it ,withdraw it.

@Prakhar_Agrawal Bro I am Banking student itself it’s not about getting loan and paying interest (that’s a most easy thing anybody can do)

It’s about knowing detail rules and understanding real logics behind this rules, because we are playing this game from years without understanding detail rules.

This all things only makes a normal trader to professional trader and a normal investor to smart or informed investor.

Anyways thanks for your suggestion :blush:

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