Suppose one buys NIFTY call 7500 + sell put 7500 + buy put 7800 + sell call 7800. Risk = 0. Question is how much is the margin?
You can use the SPAN calculator to calculate the required margin. Check the following link for details.
Hi Yubi...technically the long box is a hedged position (similar to being long and short on futures) with the position being market neutral. You are right in arguing for a minimum margin as the risk is reduced, however the risk is not zero. There is a risk of execution bearing in mind its a four leg option.
The position is risk free as long as all the four legs are implemented and continue to stay that way. What if you were to liquidate half the position say (buy put+sell call), and decide to be just long ?
For this reason, broker is justified in blocking margins.
In fact this problem will be eliminated if brokers start offering standard option products, I've asked this question in this forum for which Nithin has the following reply...
Thank You, Ajay. I had tried it out, and it shows that the 2 sell legs will each need margin. However, going to fundamentals, margin is required to cover risk. In this case though, risk is 0 (if one is not convinced that risk is 0, one can either read up on long box trades or try it out in an excel sheet). Now, if risk = 0, then why is a margin required?
Thank You, Karthik. Got it! If brokers can offer the 4 legs compounded into a single product, then one can take the execution risk out of it, and make it really risk-free.
As a first step, if we can get products for 2-leg call & put spreads or collars with margin money limited to maximum calculated risk, it would be a great start. Any idea if these are in the works?
It will be a great start Hopefully the exchanges make up their mind on it!