Why do I require so much more money to short options as compared to buying options?

When you write/short a options,risk is more,because here losses is unlimited. Suppose the market goes against we cannot predict the loss. Due to this normally brokers collecting high margins from the clients

1 Like

When you short / write an option,its unlimited loss - more risk when compare to buy

Where in shorting it is completely opposite - your profits are limited and loss is unlimited that is why exchange charge more margin for shorting

1 Like

When you buy an Option you just pay the premium and the maximum loss can be only he premium and profit can be unlimited where as when you sell/write an option your loss can be unlimited however profit is limited.

1 Like

Writing of option means selling the options which you not owned.

When you buy options your losses are limited as you just pay the premium but when u short or write an option the losses are unlimited and profits are limited.

The above example as if you buy 7500 at 50 you will pay Rs2500 so the buyer of an option will lose only the premium which is Rs2500 but when an option writer writes/short an option of same strike price 7500 his profit is only the premium what he receives initially from the buyer and as his losses are unlimited so the broker asks him to bring the additional margin. So he should have the higher margin of Rs 25000

2 Likes

Money required for shorting and buying an option differs based on the risk involved which the trader normally faces. In shorting option risk involved is unlimited but with a limited profit.

Where as in option buying its a reverse scenario. No trader will be ready to pay the losses so easily once the transaction is executed hence shorting requires more money than buying.

1 Like

In the case of option buying the maximum loss possible is limited to the premium paid and there is no other obligation.
But for option writing there is possibility of higher risk. Margin required for short sell options/option writing is more because option writing can occur unlimited loss, while limiting profits to premium received.
But if you have hedged position with help of futures then margin requirement will be much lower than the actual margin. We can know the margins before taking the positions by using the right SPAN calculator.

1 Like

OPTION BUYING & SHORTING:

Buying required more money & the risk is limited maximum loose 2500,profit is unlimited.

Shorting means profit is limited & loss is unlimited.

1 Like

Margin requirement is more for writing or shorting an option since there is no upper limit till where the price can reach.

In writing /shorting an option the risk is unlimited and the profit can be limited that’s why the margin required for shorting an option is more.

1 Like

when you are writing an option, you'll be asked for more margin this is because the high risk involved and you'll make limited profit where as in buying an option the risk is less and make unlimited profit.So margin requirement is higher while writing an option

1 Like

But when you write/short options the risk is unlimited so exchanges collect the span and exposure margin.

1 Like

Shorting means you sell an option without having a position.

when you are buying an option it ask only premium amount.When you are buying an option you have unlimited profit and limited loss.
While in shorting option more margin will block because here limited profit but unlimited loss.

So in the above example, if you bought 7500 at Rs.50, you’d pay a premium of Rs.2500 and Here you cant loose more than 2500.
While in shorting option more margin will block because here limited profit but unlimited loss.

If we shorted 7500CE @ 50 then if market goes up 150 points, your loss wiil be 150-50=100 i.e> 100*50=5000.
you can loose more than this amount if market goes up,So brokers charge you higher margin.

1 Like

Buying option indicates your loss is limited to., 50/- of 7500 call and profit is unlimited when you short call option at 50/- of 7500 call your profit would be 50/- where as loss is unlimited since loss is unlimited margin amount is kept for safeguarding position with unlimited loss

1 Like

writing an option is unlimited risk and buying an option is limited risk.

When you buy option the maximum loss is premium paid but when you write option he maximum loss is unlimited hence margin requirement is more for writing an option.

1 Like

Its all about the risk, the risk of shorting options are higher than buying options. The principle is just to make sure that you are able to close the position without default.

1 Like

1)In option trading when ever we buying full premium will be debit 

our maximum loss is whatever premium we paid.

2)while selling full premium will be credited to your trading account.

and if you are selling your old buy position there is no extra margin will be blocked and if you are short selling the option without having the buy position there is required span and exposure margin will blocked because assume you are selling option at 100 today and tomorrow it may go to 500 or 1000 also you need to buy back at this price.so if exchange is not blocking extra margin and if you do not have sufficient balance to buy back the option there is chance he can default to broker and exchange. to avoid these cases exchange calculates the maximum risk and margin required using PC span and block the highest span and exposure.

 hope this clarifies your doubt.

1 Like

In this case, there is unlimited loss and limited profit of only Rs.2500/- . So, margin requirement for short position is that of futures margin value, which is Rs.25,000/- approximately.

1 Like

In buying options, the risk is limited to the premium paid for the option, no matter how much the price moves adversely in relation to the strike price where as while writing option the risk is unlimited and so margin required will be more.

1 Like

Buying options will have the loss limited to the premium but while writing an option the loss is unlimited and so the margin required will be more.

1 Like

While buying option you need to pay only premium (advance) because you have a option to exercise the contract on the expiry date. If the option is "in the money" you will exercise but if it is "at the money" or "out of the money" you will not go with this contract. At any give point of time your maximum loss in contract is only the premium. So buying option required limited amount.

For seller he will be having a obligation to exercise the contract if buyer wishes, since he has taken a premium. on the expiry date or any other date if the spot price shoots up very high ( in case of call option writing ) or very low (in case of put option), the seller has to exercise with the agreed strike price. This will incur a huge loss to him so to settle the contracts exchange will collect a higher margin to protect the buyer interest at the time of contract settlement. 

Example: Client wishes to buy a banknifty only at 13000 level so he bought a strike price of Banknifty CE 13000 when spot banknifty was at 12500 by paying a premium of Rs 200. 

Seller received a premium of Rs 200 (25*200= 5000) and agreed to sell the bank nifty at 13000 only.

Scenario 1 on expiry

a) Banknifty spot closed at Rs 12900. Buyer is not interested to exercise the contract because in the spot he is getting lesser than 13000.

Scenario 2 on expiry

b) Banknifty spot closed at Rs 14500. Buyer will get banknifty at 13000 only and he can sell the banknifty in the spot market at 14500 and makes a profit of  1500 points ( 25*1500= 37500) with an investment of Rs 5000.

Seller has to settle the contract, so on expiry he will sell the contract @ 13000 only. 

In stock market only the cash settlement will happen so exchange will settle cash by comparing with the spot close.

Cash settlement = Spot Price - Strike price 

If It is negative no settlement contract will be worth less. 

1 Like

Does an Otpion which i short or Write gets automatically squared off during expiry??