Risk management by Zerodha to auto square off positions

Hi @nithin sir,
In this article, it is written that the positions can be squared off if MTM exceeds 50% of the funds. So what did happen yesterday in currency derivative market when there was kind of a black swan even?

If I had bought 72.5 PE option and sold 72.75 PE option, my maximum possible loss is fixed as it is hedged position. But yesterday, only 72.75 PE spiked to 21 while 72.5 PE went only till ~0.8. In this case, The 50% MTM loss of the total funds could have been seen although the maximum loss is capped way lower. So what did happen to people with this kind of positions? Were they auto squared off? If so, at what price(with respect to their maximum possible loss).

It is illogical to square of positions at 50% of the total funds if the maximum possible loss is capped at some percentage of deployed capital(not total funds). For example it could suffer loss even more than the deployed capital, say I have 1 Cr in my account and had taken position with 10 L and max loss is capped at 10%(1L), in this case I could lose freaking 50L!!! instead of 1L. Who is responsible for potential loss in this kind of scenario? Broker/Government/CDS?
This should be noted by Zerodha Risk management team to ensure that this kind of things does not happen. I understand if in worst case scenario, naked short positions are squared off but hedged positions should not incur loss more than the capped amount.

I don’t trade in currency market but curious to know this as this kind of thing could happen in stocks/index Options(less likely but still) which I trade.

Would appreciate a lot if I could get clarification.


These are freak trades, any person in sane mind would understand based on spot/future value. I remember zerodha mentioning they won’t do anything in these cases, they assess the situation and then act, So, in this case they would have not squared off any.

Yeah but freak trades are those which only spike for a few seconds, not few minutes. So, that’s little bit different. If you have traded in Sensex/Bankex, you could have seen those freak trade which spikes the option value just for seconds and come back.

Agree, but we can clearly see this happened on very few strikes, so that should be okay, believing their RMS is well equipped to distinguish between freak and normal trades.

@Bhuvan Any insights??

@Bhuvan @Ragavendran_M Anything anyone??

In the case of CDS, due to this circular from RBI, the liquidity is drained out and causes huge volatility in the options segment. In a few cases, clients have lost more than the money they have in their account due to an increase in the premium value of options which is also a broker’s risk.
This is also a regulatory risk that the client has to consider before taking a trade. Can’t really hold anyone responsible for this kind of loss.

Do you have some figures on number of people who stopped currency trading based on volume or zerodha stats? Just to understand how much liquidity was drained out

But hedged positions of clients should not be squared of if max loss is some % of the capital.
In worst case, just square of the positions when MTM hit the max possible loss?

Sorry for my language but it is stupid to square off the positions at 500% of available margin when max loss is at 10% of margin. Why can’t RMS understand this and act accordingly?

We didn’t say hedge positions are closed. Those are naked short options. For a hedge position client has to maintain a sufficient exchange-specified margin the next day morning. We won’t consider the loss in the short leg as they will be making a profit in the long leg.

But additional margin requirement of hedge position is also absurd. If someone have deployed full funds with 5% max possible loss, they need not provide additional margin because max loss is capped and well within the total available margin. If max loss itself is more than the available margin, it’s alright. But not otherwise!!

How can one arrange funds within minutes due to freakiness of only specific strike spike(not even deeper ITM)?

In case of debit spreads where max loss is only the extra premium paid, how can one loss more than that? They can’t, hence their positions should not be squared of regardless of anything!!