This one is directed to all the regular options traders out there.
As we all know that Options Market has not developed as much in our country as we would like. I mean there is not much liquidity in the market other than the Nifty Options, if you go beyond the current month contracts.
Don’t you think that one way to increase the liquidity, is to allow execution of Options Strategies as a whole, where margin requirement is based on the risk profile of the strategy and not based on SPAN. eg. If we enter a Bull Call Spread, we will risk only the premium we pay i. e. the initial net debit. So why should there be a necessity to provide extra margin for the entire strategy.
I think it is possible to trade on the US markets with only the net debit for the above strategy.
So why don’t the brokers, exchanges and SEBI work out a mechanism where you enter a strategy as a whole and also exit as a whole with only the amount at risk as the initial outlay.
And if you want to exit any one leg of the strategy, only then you need to have sufficient margin for short options.
I am sure that big institutions and HNIs will step in to provide much needed liquidity if they see better value for their money.
And the brokers, exchanges and the regulator will earn more money through their respective charges levied if they are willing to forgo the interest income they might earn by keeping traders’ capital with them in the form of security.
What will be the drawdown for such an initiative?
Problem is with FNO contract sizes , nothing do with the Option strategies. If you go by Old FNO contract size ( see screen shot) over the period of time along with the stocks price rise, contract sizes doubled/tripled in terms of percentage 100 % to 300 % , so need of higher margin & capital , liquidity dried down And our great SEBI / Exchanges , instead of addressing this issue , indulging , going against retail traders/investors . I was trading individual stock options & i was making money , now due to contract size , i stoped trading in individual stock options
There are multiple factors involved here:
The big problem with this whole setup in the Indian markets is that despite all claims, the retail participation is really-really low even in equities (forget about options). Most of the claims of increasing trends in retail investments in equities is also through the much hyped Mutual Fund (and SIP) route. Imagine the condition of participation in the options market.
Secondly, mutual funds and other established entities are NOT allowed to trade in options using investors’ money. So at the end of the day, it is only the professional traders and marketmakers who are trading in the options market which is another limitation.
You rightly cite the example of US where trading on strategies is allowed which keeps the market highly liquid. But also see China, where equity participation by retail investors is really very-very high (direct investment in equities, not through MFs). However, Chinese options market is yet to open to retail investors. AFAIK, they allow tiered trading approach - i.e. a starter will be allowed only long position in options. After few months, he can start shorting, and later combinations.
The big problem in India is individuals are half-educated, and Options (and Futures) are cited as “Weapons of Financial Destruction - WFD”). Rather than options being used for hedging, the punter characteristic among the ignorant but highly confident “traders” (those who claim to be) leads to enormous losses while trading options. It also leads to people taking combination positions, but exiting the profitable leg too soon, and holding on to the loss making leg for long which magnifies the loss.
It is possibly for this reason that combination margins are not allowed by most of the brokers/exchanges.
High margin requirements force people to stay away from taking dangerous positions. I’ve been making a living out of trading options since last many years. In my honest opinion, this should be left as is as bulk of our countrymen remain largely ignorant about working of WFD and the huge loss potential.
Yes but if this is to be done then the only options here are to either educate the currently “ignorant” speculators (which would take ages) and then open up the strategy level markets, or to straightaway open up the markets either fully or similar to a tiered approach you mention.
If we wait for all the speculators to wise up and either leave or trade systematically, i would be long gone by then 
There are always people who lose money in the markets. If the regulator doesn’t take a step forward, how will we develop our markets.
Its not like they don’t goof up on the most simple of regulations, and quite frankly they don’t give a damn about retail traders.
I still believe they should allow strategy execution.
Its not the lot sizes man. Right now we are paying up 20% margin on short stock options. Imagine it coming down to just 2-3% when we enter a limited risk strategy.
As an option trader who has been making a living out of this market for last many years, I too concur with your desires and expect more liquidity through such measures.
However, the world is a different place. Opening up the market will lead to more and more losses for common ignorant, but highly confident speculators. No sane regulators would allow that.
Let me cite an example for comparison and where the problem lies. IFCI stock used to trade above Rs. 110 around 10 years back. Since then it has come down to current levels of Rs. 18 to Rs. 30, and is stuck in that range since last many years. Investors who bought this stock at higher price levels can still wait till infinity with a hope to recover their money in uncertain future because stocks don’t have an expiry date.
But Options do have an expiry date - going by the liquidity in the market, it is usually 1 month for stock options and 2-3 months for index options. The ignorant punters will end up on the loosing side with their half cooked knowledge and overconfident directional bets.
To draw another parallel with options - Remember the state-run lotteries during the 90s where many state government had started selling lottery tickets with daily draws offering payout of 1-to-8? It was forced to be closed in a few months as the same ignorant people were loosing the money (same like options with daily ex-date).
Just like CO & BO reduces your risk and increases leverage, similarly spread orders will do the same decreasing margin requirement as there will be no unlimited risk.
I second @bigbullinside. I don’t see a point why the margin requirement for hedged strategies should be so high. Ofcourse, higher margin should be blocked for traders who sell naked option to account for proper risk management for brokers, but buying and selling of spreads with low margin requirements should be permitted in order to improve participation in the Options segment.
@iSTFF infact this is the only way to increase liquidity in option segment if sebi truly cares about retail investors. Since as soon as risk along with margin comes down people will participate.
Let me give another example:
Buying one lot of BANKNIFTY option (size 40) at a typical premium of Rs. 250 will cost around 10,000 Rs. (no margin money needed).
Shorting the same one lot of BANKNIFTY requires around 60K as total margin money. Effectively, one lot trade (long or short) needs a maximum of 60K.
Buying the option by putting in 10K, one is aware that he can loose a max of 10K. But shorting can potentially lead to much bigger loss than what he will receive as 10K option premium. It is therefore important that shorters are made aware of this loss potential through an adequate margin money requirement.
The discussion here is about lowering the margin requirement for combinations. Combinations involve both long and shorts. Shorts always bring in uncertain high loss potential so margin is needed.
(1) As I said earlier, people tend to close their profitable leg too soon for lower profit, and hold on to loss making legs for long with uncertain confidence that situation may reverse. (Behavioral issue)
(2) Time Decay in options leads to loss for long positions, even if the other factors remain same or move favorably. It may adversely impact overall combination positions, so margin money is needed to cover for that.
(3) Comparison is being made by what is allowed in the US. Lower margin is allowed in US, because authorities there have the power to deduct money from one’s account if they have genuine reasons. That includes deducting money for such losses on trades, or taxman taking money if they believe the individual has not paid adequate taxes (Remember the film “Pursuit of Happiness”?). Even if the individual does not have sufficient money in his account to pay for any such loss, he is put under scrutiny and made to pay in future with interest as the legal framework and government surveillance system allows and facilitates that.
That’s why low margin (net debit) is allowed in countries like US. In India, it is not possible in current system.
All of us (including me) at times crib about high margin requirement. But based on my experience, it is necessary. If a person does not want to keep an upfront 60K for a trade that involves WFD with high loss potential, he is indeed ignorant.
My two cents - be safe, rather than sorry. Trade WFDs only when adequately funded.
I understand your point on people itching to close their winning positions. But as i said earlier, strategy execution should be made possible for entry as well as exits, as a whole. And if anyone wants to exit their winning leg (which may be a long option) and keep their losing leg (short option), then they need to have sufficient margin for keeping only the short leg open.
I am again stressing on executing a whole strategy. eg. You buy a Bull Call Spread & you sell a Bull Call Spread.
If you want to exit your Long Call to book profit, then keep adequate margin in your account. Without that you will only be allowed to exit both the legs at a given time, or maybe only the short position if the long premium required is available in the account. This part, i think, would only be possible from the brokers’ end and not the exchanges or the regulator.
And i still don’t agree with the point that those who have learned to trade options, should be robbed a chance of increasing their returns just because speculators need to be protected from themselves.
That’s the point - Entry will appear very cheap, very easy, and very lucrative, so people will jump to it.
And exit - may often become Very difficult !
Reason - options market dynamics and pricing mechanism work in a complex way. Black-Scholes is widely followed model, but it is highly skewed and improper. What you expect in theory and models, may not happen in reality.
Add to it the cases like many F&O securities very frequently getting into F&O ban period - that’s when you may see the profits theoretically, but wont be able to encash them in reality.
No market or broker can guarantee that your combination (involving multiple option positions) can be entered/exited at your desired levels. Its a new ballgame altogether and in the US it works as brokers and marketmakers are available to suffice.
Now the whole summary 
Irrespective of we all agreeing/disagreeing/supporting/opposing each other - nothing would change by our beliefs and thoughts.
Regulators are the deciders, and they operate as an institute. No one person takes a decision. With decades of experience and exposure, they know the holistic picture much better than you and me, and they take the right call.
This has been a great discussion thread and as of today, I believe the markets are working perfectly and are best regulated in the interest of all common traders.
FYI, related thread: