How can I sell a covered call for a stock that I own (& pledged)? I tried selling a call option today but the kite app had deducted margin from my account. I was expecting only minimum margin (5-10% of normal) to be used as I hold the shares in my account. Is it becoz of the pledged status of the shares?
By pledging you will get collateral to trade fno, but the margin required will still be the same to short options. Minimum 50% should be in cash and rest can be from collateral. Theoretically this is a covered call but still equity in demat is not used to get hedge benefit for selling options.
Is this how the Indian regulations are? or is it more to do with how Zerodha handles the covered calls?
US brokers normally would not ask for a initial/maintenance margin when you sell a call option for the stocks you own. This is normal and that is how options are designed to work.
When I have the shares in my demat, why would SEBI/Zerodha ask for same margin? please explain.
As per my knowledge this is how it works in India.
For stocks, you need to keep 50% margin in cash as for Zerodha. Only if you pledge liquid etf, you don’t need to keep 50% cash. May be some other broker will allow with no margin even for stocks. Inquire…
I believe you should challenge this with SEBI. Margin should be blocked only when the borker/regulator/counter party see a risk in the options trade. In my case, I have the shares and I am willing to sell my shares (i.e call option) at a predefined price in future. What’s the point of asking for margin from the option seller?
@ Harshajyoti_Das I am not talking about the margin (cash/stock pledge) requirement. I am selling a covered call and trying to find a reason why would zerodha/sebi need a margin for this.
What if you sell call option and then sell the stocks too before squaring off your short call?
Then broker has to make margincall. Same like when you open a position, margin requirements added and then at close releasing margin.
When zerodha loosing some benefits suddenly regulators come in picture.
No broker or regulator can/should force a trader to put more money on the table to cover all circumstances. When the scenarios change, margin policy should be applied to that particular circumstance.
In your example, broker should ask for more margin (my call had become naked as I’d sold my shares). And if I can’t put more money on the table, they should square off my positions to bring it under control (or de-risk).
I should be able to do things like A, B, C or A, C ,Z. isn’t it?
Today only stock options shown huge slippage. Because operators knew that even with covered call positions zerodha will ask high margin. Retailers who can’t add more margin become victim of force close.
Fortunately sebi plans to come up with new margin policy framework for hedged positions where margin will be blocked based on the risk, expecting this to come in next few weeks. Still covered call may not be covered but most other strategies will be.
Thanks Siva. Hope you will follow up with the regulators on this topic to allow zerodha provide a margin less (or lower margin) for covered calls.
how much margin one gets against Liquid ETF ?
10% is haircut, so one will get 90%. can check here for haircuts.
Do i need unpledge the shares if i my covered call position get exercised on the day of expiry?
Since pledged shares are’t in your Demat account, on expiry day if your Option is exercised you will be penalised for short delivery. To avoid short delivery you should unpledge these shares at least two days before expiry.
if the client forgot to unpledge and if it went to the short delivery ; will u as a broker let it go into the auction OR you will just honour the delivery from the pledged , in the best interest of the client ?
To honour the obligation of delivery client needs to have shares in Demat account, if not it will result in short delivery and appropriate penalties will be charged by Exchange.
suppose it went into short delivery . BUT later client request u to unpledge and honor the delivery so that the client save the auction and penalty cost ; ; so ; do u consider the request of the client and help the client from going the position into the auction ?