Margins, Peak margins & margin shortfall
TABLE OF CONTENTS
- What is Margin?
- What is Peak Margin?
- What is the difference between Peak Margin and End of Day or EOD Margin?
- What happens if one leg of a hedge position is removed
- without sufficient margin?
- Are cheque payments considered for margins?
- Can I pledge a stock to get additional margin?
- What will happen if the stocks I gave as collateral moves out of EQ series OR its haircut increases to 100%?
- Will I be allowed to use the profits I have made in F&O Trading for further trading on the same day?
What is Margin?
Margin is the Up-front amount required to be maintained by a client before he takes a position. This Margin is decided by the Exchange and differs from Segment to segment. Let’s see the broad framework in which this operates for different segments
At Tradeplus, we collect a minimum of 20% of Traded Value only for Intra day trades in Equity segment. It differs for Delivery based trades
What is Peak Margin?
Now we know what is Margin. Let us go to the next step to understand what Peak Margin is. It is nothing but the highest Margin required by a client on any given day. To determine the highest margin, the Clearing Corporation randomly takes minimum 4 snapshots of the margin required on a given day. The highest of the 4 snapshots is the peak margin which the client should have maintained during the day.
Let’s see it with an example
Imagine you have bought a Nifty 17350 in the morning with a balance of 1.5 lakh in your account. As mentioned above, the Clearing Corporation will randomly take minimum 4 snapshots of the margin required for the position during the day and the margin requirements in all these 4 snapshots could vary as given below
The highest or the peak of all the 4 snapshots is 1.06 lakhs and that is the Peak Margin Requirement
What is the difference between Peak Margin and End of Day or EOD Margin?
Peak Margin is the highest margin required on a given day. End of Day margin is the margin prescribed by Exchange at the end of Trading day.
What is a Hedge?
Hedge is a protection created for your trading in the event of market turning against your expectation. If you had a long position in Nifty you are un-hedged but if you buy a PUT Option simultaneously, you are then hedged. This is because, if market falls, the loss in Nifty long position will be limited as your PUT will start making money. This is called a hedge.
To encourage traders to take positions with due protection, SEBI has provided huge margin benefits to those who trade with hedge strategy. A hedged position can reduce your margin requirement as much as 70% or even more.
As seen above, a unhedged position i.e, Sale of 17100CE requires a margin of 120559.3 while the sale leg hedged with a buy CE drastically reduces the margin requirement from 1.2 lakhs to 22951.
This is just an illustration and the reduced margin requirement could be even lower. This is the great benefit of Hedging.
What happens if one leg of a hedge position is removed without sufficient margin?
The margin requirement doesn’t change majorly as long as the hedge leg stays. The moment one of the hedged leg is removed, it shoots up and margin shortfall arises
1) In the illustration above, if you square off buy call leg, the margin requirement will then shoot up from 22k to 1.2 lakhs.
2) Margin shortfall can arise, if your buy leg expires on the weekly expiry if you had taken a weekly expiry Call option but retain the sell leg with monthly expiry.
3) Even if you close both legs of a hedged trade, a shortfall can arise if the highest margin snapshot is taken at a time when one leg of the Hedged position is closed and the other is yet to be closed.
So, we suggest you to ensure that you have sufficient margin before you remove one of the hedged leg to avoid penalty or close both the legs simultaneously. Shortfall on account of the above scenarios will result in Margin Penalty debited
Can I convert my position from Intra day to Carry forward/ Delivery?
You can change your positions from MIS (Intra) product to the NRML /CNC/Delivery (Carry forward product). However, this can be done only if you have sufficient margins for the Carry Forward position. The change of position needs to be done at least 30 minutes before market closing time or before the auto square off gets triggered.
You can also change NRML positions to MIS. You cannot however do this once the auto square off process is started.
When will my Intrady positions (MIS/CO) be squared off?
Any order placed under MIS and CO will automatically be squared off within half an hour before the market closes for respective exchange segments or any other time as mentioned from time to time depending upon the market volatility OR when the Intraday MTM reaches 60% whichever is earlier. To read our complete risk management policy click here.
Are cheque payments considered for margins?
No. Unrealized cheque payments will not be considered for the margin/MTM shortfall. You should do an online funds transfer to hold such positions.
Can I pledge a stock to get additional margin?
You may use the stocks held in your demat account to get additional margin to buy stocks in Equity segment (via MTF) or to take positions in derivative segment. Read here to know more about MTF trading. Generally, though not strictly, stocks under Nifty 50 and Nifty Midcap where the VAR margin is equal to or less than 30% will be accepted.
Here, we will see how much leverage will be added to you in F&O segment if you provide stocks as collateral. There are 2 basic points which needs to be noted here.
- Value of stocks after haircut as only that value will be added as collateral limit
- 1:1 Cash : Collateral ratio required. At any point, minimum 100% of the collateral value should be available as cash i.e., the ledger credit, to avail collateral benefit
Let’s understand this with an example
Actual Value of Collateral Stock
Value of Collateral Stock after haircut
You may notice here that as the ledger credit reduces the collateral value considered to provide limit also reduces. This is because, at any point of time, minimum 100% of the stock collateral value should be available as clear ledger credit. In other words, the cash collateral ratio at any point of time should be 1:1. From scenario 2, the ledger balance is lesser than the value of stock collateral, hence, the limit provided based on stocks pledged is restricted to the cash credit available thus making the cash collateral ratio to 1: 1
When you utilize the entire fund including the stock collateral value to trade in Options segment, the funded value equal to cash collateral will be charged with 2% interest till the date of clearance of debit. For eg.,
Cash Value - 80000
Stock Collateral Value - 80000
Options Position taken (utilized - 150000
Interest will be levied on 70000 (i.e., 150000 less Cash value of 80000) at 2% p.m
Note: Mutual Funds, LiquidBees, ICICI Bank and ICICI Prudential shares will not be accepted as ollateral.
What will happen if the stocks I gave as collateral moves out of EQ series OR its haircut increases to 100%?
If any of the stocks that you had given as a collateral moves out of EQ series or if the haircut of the stock increases to 100%, then it becomes ineligible to be a collateral. It will therefore, be removed from pledge and moved to your Demat account.
Your collateral value will therefore, gets reduced as one of the stocks that you had provided as collateral is now removed. You will in such a scenario be required to bring in additional funds or other eligible collateral stocks to maintain sufficient margin against the position, if any, you had already taken based on the old collateral value.
Will I be allowed to use the profits I have made in F&O Trading for further trading on the same day?
As per SEBI Regulations, settlement cycle for derivative segment (F&O) is T+1 day. This implies that if you make profits trading in derivative segment (F&O), it will be settled on T+1 day only.
Therefore, if you take an F&O position & make profits, we will not consider the profits made on T Day while reporting margins to the Exchanges, as they are realized on T+1. These profits will not be clear balance on that day, and thus won't be considered as available margin for trading in F&O.
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