Initial margin would need to be paid on the options sold by the client.

The minimum initial margin for short index options is 3 per cent of the value of the contract while for short stock options the minimum margin is 7.5 per cent of the value of the contract.

Value of the contract is the short option position multiplied by the last closing price of the underlying stock or index. If the price of the stock underlying the stock is highly volatile, the margins may be even higher. Subsequently, mark-to-market margins need to be paid.

In the case of options, however, margins need to be paid only in the case of short options - that is call or put options sold by the client.

Given that these strategies involve combination trades, a favourable system would be to calculate the margin required on a portfolio basis. However, it is not done that way. Margins are collected with respect to each contract of the client. This is in accordance with the regulations of the National Stock Exchange. Even in the case of a combination trade, the profits on options bought are usually not set off against the loss on options sold.

There is a reason for such an approach. If out-of-the-money options were assigned before the time to expiry, the broker would know about it only after a day.

It may prove difficult to collect the loss from the client after the options are assigned. As such, brokers may ignore the profits on options bought and require the client to pay the margin on the loss-making options sold.

The problem may be resolved if it is ensured that assignment in the case of combination trade happens on all the legs of the transaction. The client himself may not, however, prefer such a situation.

Therefore, there is no option but to pay margins on options sold without considering the profits on the options bought.

Queries relating to futures/options may be sent to fno@thehindu.co.in or to Futures & Options, Kasturi & Sons, 859-860, Anna Salai, Chennai 600 002.

Suresh Krishnamurthy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page