OTM options extra margin

Hi,

I am holding Tata motors SHORT 100 PE for last 10 days and CMP is 113. I know that Zerodha charges extra margin if it turns to ITM but today I realized that much of my capital is blocked even if my option is way out of the money.

@siva can I know why this happened?

This is the expiry week. My guess is you are charged additional margins because TATA Motos is a compulsory physically settled contract. 50% of the contract value will be charged as margins for this. More has been explained on this here.

Is this extra margin levied by exchanges or brokers? And will not having this margin result in margin penalty otherwise if position cannot be squared off.

The additional margin is levied by the broker. While there’s no margin penalty as such, your positions are liable to be squared off in the event that you don’t bring in the additional margins. You may also have to pay interest on any debit balance that arises out of the increased margins not being fulfilled.

Right but I remember talking to a zerodha guy who said that these extra margins will be charged (in the last week) only for ITM options and mine is OTM here. Is that wrong?

So, does Zerodha charge even if it was Tatamotors 70 PE (way out of money) and CMP is 115?

If you’ve short an option contract, additional margins will be levied regardless of the moneyness of the option. If you’re long options, the Exchange itself will levy additional margins for such positions.

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@nithin @siva I strongly suggest that zerodha reconsider this policy of charging extra margin in the last week. Especially with large stocks becoming physically settled from september (INFY, Reliance etc.). Atleast for the highly liquid stock options extra margin should not be levied. Would make zerodha totally useless for option trading (even covered call strategies) and I would be forced to move out. Brokers even like HDFC Sec only ask for a thursday 2pm squareoff.

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Technically brokers can’t ask clients to square off a position just because their systems can’t handle the settlement through physical delivery. It’s not in the spirit of the circular issued by SEBI.

The reason we insist on additional margins is that in the eventuality that the position you are holding has to be settled by way of receiving/giving physical delivery, sufficient margins are available in the account to cover for such positions. Also, the margins are charged incrementally and not levied one shot.

About giving margin benefits in specific cases, there are some changes our OMS vendor has to make which with whom we’re in touch with. Post that, hopefully, you’ll receive benefits for all such delta-neutral strategies.

Zerodha is the only broker charging higher margin on expiry week for stock options. Would be better to think of an alternate way like squaring off on 2 pm expiry day. I have a large account here and have liked my experience with zerodha over the years. But if this policy remains even for the large stocks coming into physical delivery after september… would be forced to find alternatives :frowning:

We wouldn’t want to circumvent the SEBI circular by squaring off/asking clients to square off positions earlier than expiry. If a client desires to take delivery by fulfilling margins required for such physical delivery, how can a broker not allow that to happen? Also as I said earlier, we are working with our OMS vendor to pass on margin benefits in specific cases, we’ll keep you posted.

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Well if client has the required funds can always do physical delivery…

Even on zerodha client has to specifically ask for physical delivery I think. Shall wait for updates on OMS… probably OTM options can be excluded from higher margin requirement.

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Yes, at least can give exemption to OTM options :slight_smile:

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Yup, this should happen.

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@nithin @VM1 @siva This expiry month onwards, all F&O stocks have come under physical settlement. As discussed in this thread, hoping that the additional margins during expiry week won’t be levied in a blanket manner on all short option positions. While it is fair to levy additional margins on short ITM or CTM options, bringing short OTM options under the requirement of additional margins would be the final nail in the coffin that would render option writing meaningless (higher margins, physical settlement etc have already done a huge damage). Hope these changes would be effective this expiry month onwards. Please confirm.

From this expiry we will be charging double the margins( 2 times of span+exposure) on only wednesday and thursday and not from monday. Will be applicable on OTM short also.

That means if normal margin to sell option is 1 lakh maximum it can go would be 2 lakh and that too only after Tuesday in expiry weak. Correct

Correct,only on wednesday and thursday this will be applied, same for futures also.

And What would be the margin required for buy options.

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If the long are ITM the same double margins( 2 times of span +exposure) are required to hold them on wednesday and thursday of last week.

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