The New Margin Framework is in place from 1st June 2020 onwards. Now even small traders can start benefiting from the margin framework.
Most of the Option Spread based strategies margin got reduced by 60-70% in the new margin framework. This helps most of the option buyers and option sellers to move towards hedged spread strategies for high returns.
Which Strategies Benefit the Most?
Strategies like Vertical Spreads, Calendar Spread, and Diagonal Spread are the most benefited option strategies as the margin required to get as low as less than Rs35,000 for 1 set of execution.
How to Benefit from these Margin Rules If Iam a small account holder?
Most of the Spread based strategies has a option buying position and option selling position.
Lets consider a simple example here. Let say I want to execute Bearish Diagonal Puts Strategy where I want to execute both Short 9700PE (18th June Expiry) and Long 10000PE ( 25th June Expiry).
If you are a small account holder with a margin less than 50,000 then remember you have to execute the spread of the long option i.e Long 10000PE ( 25th June Expiry). first and once the execution is confirmed then one has to execute the short option position 9700PE in order to get a margin benefit as shown below.
Always executing the buy position followed by short position will bring reduced margin effect automatically.
Else If one try to execute the short option first will result in more margin requirement say 1.02 Lakh rupees and the placed order will be rejected if in case enough margin is not there in the system
And by shorting the option the trader will receive a premium credit of Rs 79.80 the very next day into his trading account.
So the effective investment is Margin Required – Premium Credit x Lots Size
= 35000 – 79.80 x 75 = Rs 29015/- is the effective investment for this Bearish Diagonal Put Strategy.
How to Close the Multi Legged Position
One can close the position by squaring off the position simultaneously using a square-off option from the broker terminal as shown below.
The other way to do is exiting the short option position first followed by long option position.
If in case if your broker provides multi-order execution then the order execution becomes even simpler to enjoy the reduced margin.
Last but not least with the new reduced margins not only the reward increases for the low-risk trading strategies. But also the risk and the probability of profits increases simultaneously.