What is the reasoning behind this additional amount being blocked?
Hello,
Firstly, you have to pay a Normal margin(Span+Exposure) when you write an option to ensure risk management is in place for the nature of writing an option where your loss can be potentially unlimited. When you sell an option, you also receive a premium from the buyer of this option.
The credited premium ideally doesn’t belong to you until the option is completely out of the money and goes to Rs.0 in which case the entire premium is your profit but this is not always the case.
Lets see with an example why additional margin is blocked:
If you sell a deep in-the-money option, say Nifty 9000CE which is at Rs.1000, then the buyer of this option will pay you a premium of Rs.75,000(75*1000) for this. This amount adds up to your cash balance but doesn’t belong to you yet.
You can now place a buy order for Nifty 9000CE at say 700. Along with this, you could take additional leveraged Intraday positions with the Rs.75,000 premium amount which is risky at the broker level. This is the reason additional margin is blocked for your option buy position to ensure funds are retained for settlement when the position is squared off as the premium amount has to be paid back in this case when the option position is squared off.
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