What is the margin required to take a hedged position? Why am I unable to enter a hedged position even though I have the required funds?
If you execute a futures position or carry a short options position, the entire margin for each individual trade must be available in your trading account.
On the other hand, if you enter a position with hedged trades, it reduces your portfolio risk and the margin required for your portfolio will be lower than the margin applicable for individual positions. This is called the Spread Benefit- the benefit of lower margin requirements as a result of lower risk at the portfolio level.
For example:
| Particulars | Single leg order- Short call 17600 | Call spread strategy-short 17600 CE & long 17800 CE |
|---|---|---|
| Margin for Sell- 17600 CE | Rs. 1,50,000 | Rs. 1,50,000 |
| Margin for Buy- 17800 CE | NA | NIL |
| Total Margin | Rs. 1,50,000 | Rs. 1,50,000 |
| Margin Required | Rs. 1,50,000 | Rs. 35,000 |
| Margin Benefit | NIL | Rs. 1,15,000 |
Earlier, in order to execute a single leg call, you were required to have a minimum margin of Rs. 1,50,000 for the order. By executing the buy leg and then the sell leg order, you will be able to benefit from hedged margins.
- With a hedged strategy, your margin requirement is lowered to Rs. 35,000.
- For this, you must execute the buy position first (before placing the sell order). This is because the sell order's margin requirement will come down from an individual position requirement of Rs. 1,50,000 to a portfolio strategy position requirement of Rs. 35,000.
- So if you have an open buy position, it acts as a hedge against the sell order to be placed.
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