SEBI in Oct 2024 announced measures to reduce volatility in options on the expiry day. While four of the measures are already in place, there are two that will go into effect from today. One of them is the removal of calendar spread margin benefit on the expiring contract affecting futures and options calendar spread contracts. Check the circular here.
On the expiry day of the F&O contracts, there’s a higher risk that the price of the contract expiring will behave very differently from contracts expiring at a later date. This is because of larger trading volumes on that particular day, which can lead to unpredictable price movements.
We’ve listed the margin changes for a few strategies in the image below. (If the image is not clear, you can check the examples here)
From the above example of the SENSEX Future calendar spread, the standalone required margin for the long future leg: is ₹1,75,876, and the short future leg: is ₹1,75,908. However, due to the spread benefit, post the execution of both the trades, the margin thats gonna get blocked in your account will be reduced to ₹38,191.10. The margin benefit remains applicable until the expiry day.
However, on expiry day, the margins will be blocked separately for each position of the calendar spread combinations, increasing the total margin requirement for the positions to ₹3,51,784.
To show an example, refer to the options calendar spread strategy added to the basket, with both legs expiring at a future date.
As both of the legs expire at a future date, the final margin post-receiving hedge benefit is much less than the strategy below, where one of the calendar spread positions expires today.
We can notice the difference in margin between two snapshots. As stated above, the margin will be computed individually for all the calendar spread positions with any leg expiring that day.
This sudden margin increase would result in a shortfall if the account doesn’t have sufficient funds. And shortfalls may attract margin penalties as well. To avoid such instances, we recommend you either maintain an adequate balance in your account or square off your position one day before the expiry.
Any questions, please post them below.