Presuming I have INR 5,00,000 cash in my trading account and I plan to start a covered call strategy for Reliance.
So I buy 250 shares of Reliance at 2000 per share. A total of INR 5,00,000.
Trading account balance is now 0.
Then I pledge these 250 shares. Presuming the haircut is 20%, I get collateral margin of INR 4,00,000.
I now add INR 50,000 cash to my trading account.
It takes INR 1,00,000 to sell a call.
So let’s presume I sell 2040 CE at 50 rupees.
Since writing calls requires 50% in cash, and 50% in collateral - 50k of my collateral is used, and 50k of my cash is used.
That leaves me with 0 cash and 3,50,000 in collateral.
After two weeks, let’s presume that the price of Reliance increases to INR 2100 and the price of the 2040 CE increases to INR 100.
Here are my questions:
- The value of my Reliance shares is now 2100 x 250 = INR 5,25,000.
So will the value of my collateral margin increase to 80% of 5,25,000 = INR 4,20,000 (minus 50,0000 for writing the call) - So will it be INR 3,70,000?
The cash balance in my account at the start of this trade was 0.
In this case, the naked written call has a loss of INR 12,500.
(1) I’d like to know if my account will show a debit balance - and will I be forced to add 12,500 to my account to keep the positions open - so that they don’t get squared off by the RMS?
(2) Or - will the INR 12,500 be deducted from the collateral margin of INR 3,70,000 - and my margin will now be 3,57,500, and my cash balance will continue to stay 0.
(let’s hypothetically presume that the margin requires stays constant at 1,00,000 per lot for the sold call)
If (2) option is correct, then I’d like to know at what point (how much losses can I incur on the written call) will I be forced to add cash to my account, so that the position is not squared off my the RMS?