How much margin is required to sell an option in nifty?
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What is the margin required to sell Nifty options?
Margin is a specific percentage of the amount of the option trade you are supposed to maintain with the stock exchange after you sign an option contract.
The basic purpose of the margin is, it protects the interests of investors/traders and stock brokers too. The margin limits the losses of the investors/traders and at the same time, the stock brokers need not get involved in cushioning the investors/traders losses.
Features of the Margin:
Option Buyer:
If you want to buy stocks then you will have to pay the premium of the contract and when the deal gets finalized the balance amount should be settled in the next two working days.
However, the NSE/BSE will transfer the premium to the stock broker of the option seller and it is deposited into the seller’s trading account.
Option Seller:
If the seller’s contract fails then the loss incurred by, shall be limited to the premium amount.
Required Margin for Option seller:
Seller will have to deposit margin amount as a security because the price fluctuations in option price of your underlying assets can cause a considerable loss.
The margin amount is dependent on the volatility of the underlying asset and the option contract.
If Shri. Z sells a lot size carrying 500 shares of call option of Y company. Then, if the premium received by the stock exchange is INR 10.00 for the strike price of INR 980 and the margin is about 20 percent of the option position.
The option position stands at 500 X980 ( 4,90,000/-) and the margin amount will be (20 percent of 4,90,000/). That means, it will be 98,000.
Margin:
There are various kinds of margins that feature specific purposes, such as initial margin, and maintenance margin.
Initial Margin:
At the time of buying of the underlying assets, you will need to make minimum payment of capital/equity which is why it is called initial margin.
The process of margin is implemented to avoid excessive, irrational trading by traders and restrict unnecessary speculation.
Your trading account must be limited to the set margin and you are free to utilise the account until the amount is equal or greater than.
Maintenance Margin:
If you are holding a trading account then you should hold a minimum margin amount in case you fail to maintain the margin level, the broker has the authority to sell the equity and bring it back to the initial level.
Options Settlement:
You may be prepared to sell or purchase an option, but you have the option to exit before the date of expiry, by considering an offsetting position in the market. Otherwise, you can continue to hold the stocks until the maturity date and then the clearing house shall settle the trade.
The approximate margin required in Nifty Option selling for 1 lot is Rs. 65000/- to Rs. 80,000/-. You can reduce the margin by hedging. Even you can sell options in nifty with just 20,000/- also.
What is Hedging:
Most of the traders use hedging to reduce the margin for selling options.
Buying far away options of the same quantity as what you are selling is known as hedging. Some investors use hedging to cut down the risks and some traders use this for reducing margins.