Update on hedged F&O open positions
What is the change?
Let's understand the changes concerning the un-hedging of your F&O open positions:
Previously, you could un-hedge your F&O open positions even if you had insufficient margin, which would lead to margin shortfall and the un-hedged positions used to be squared off by the Risk Management System (RMS). However, from October 30, un-hedging your positions when there is a risk of a margin shortfall will not be possible and your order will be rejected.
The rejection message will be "RMS:Square Off Order Margin Exceeds, Cash Available:50000.00,Additional margin required:39006.49 for entity account-ABCXYZ10 across exchange across segment across product."
You will be able to un-hedge your F&O positions as long as you maintain sufficient margin that will be required to cover your positions after the un-hedge trade.
Why the change?
This adjustment is driven by the fact that when you un-hedge your positions, and there's a margin shortfall, the Risk Management System (RMS) squares off your position which leads to booking of losses and unfavorable position closures. To prevent these situations, we have introduced the changes described above.
How Can I Seamlessly Adapt to the New Changes?
To continue trading smoothly in light of these new developments, you can adopt to either of the following approaches:
Approach 1: Square off your options sell position or futures buy/sell position first (hedged positions) To avoid any increase in margin requirements and potential margin shortfalls, you can square off your un-hedged positions first.
Approach 2: Maintain sufficient margin Ensure that your account holds a sufficient margin balance. This will be essential when you square off your hedged positions and the required margin increases, as you will need the available margin to meet the increased margin requirements.
Below are the most common scenarios that could lead to the above instances:
| Strategy | Legs                 | Required Margin post squaring off hedged position | Available margin | How can you avoid order rejection? |
|---|---|---|---|---|
Call spread | Nifty 19700 Call Buy ------------------- Nifty 19600 Call Sell | 90,000 | 50,000 | 1. Square off 19600 Call first. 2. Maintain sufficient margin i.e. 90,000 |
Put Spread | Nifty 19500 Put Buy ------------------- Nifty 19600 Put Sell | 80,000 | 40,000 | 1. Square off 19600 Put first. 2. Maintain sufficient margin i.e. 80,000 |
Short Straddle | Nifty 19500 Put Sell ------------------- Nifty 19500 Call Sell | 1,20,000 | 1,30,000 | No impact |
Short Iron Condor | Nifty 19500 Put Sell ------------------- Nifty 19500 Call Sell ------------------- Nifty 19300 Put Buy ------------------ Nifty 19700 Call Buy | 1,50,000 | 1,00,000 | 1. Square off 19500 Call and Put first. 2. Maintain sufficient margin i.e. 1,50,000 |
Short Butterfly | Nifty 19400 Put Sell ------------------- Nifty 19600 Call Sell ------------------- Nifty 19300 Put Buy ------------------- Nifty 19700 Call Buy | 1,70,000 | 1,20,000 | 1. Square off 19600 Call Sell and 19400 Put Sell first. 2. Maintain sufficient margin i.e. 1,70,000 |
Covered call Fut | Nifty Fut buy ------------------- Nifty 19600 Call Sell | 1,30,000 | 1,40,000 | No impact |
Protective Put | Nifty Fut buy ------------------- Nifty 19600 Put Buy | 90,000 | 50,000 | 1. Square off Futures positions first. 2. Maintain sufficient margin i.e. 90,000 |
What is the required margin, hedge margin benefit and margin shortfall?
- Required Margin: It is the total margin required to place an order. If the available margin is less than the required margin, the order will not be placed. This is the minimum amount that you need to have in your account to place the order.
- Hedge Margin Benefit: When you create any hedge positions, the margin requirement reduces (depending on the positions) since you have created multiple positions in different directions to reduce the risk. Since you have created a hedge position, you will get the hedge margin benefit and the total required margin will reduce.
- Margin Shortfall: If the market moves against your positions and the available margin falls below the required margin due to increase in the losses, this will lead to a margin shortfall and your position will be squared off by RMS.
You can check the margin required and the hedge margin benefit received with the help of the Kotak Margin Calculator. Click here