What is the margin system?
Options are leveraged instruments, predominantly used for hedging cash portfolios. While buying options, the trader pays risk premium and while selling options, the trader gets a risk premium.
The total risk for an option buyer is limited to the premium, while the risk for an option seller is theoretically unlimited. Exchange charges SPAN and Exposure margin to mitigate the risk inherent in option selling.
The SPAN and exposure margin were calculated on each leg in the previous margin system, even if traders hedge their options legs using different strike prices.
This problem has been addressed by the new Margin system, in which traders can reduce their margins drastically by hedging naked options.
New Margin System and Its benefits
Usually, option sellers preferred naked options, as the margin benefit for holding hedges wasn’t that lucrative with the previous margin system. Using another leg to hedge a naked leg usually leads to an increase in cost. Thereby, decreasing the probability of profit.
With a new Margin system, NSE has addressed this issue. The new system reduces costs for the hedged position by a factor of up to 70%.
Traders can now drastically reduce their cost of selling options by buying some OTM options as a hedge. The cost comparison is as follows:
The margin required for a bear call spread is now just Rs. 21,800 with margin benefit of Rs 1.05 lks, almost 60% lower margins than what was required earlier.
*Source: Zerodha Blog Page
Current issues in order placement
The brokers are unable to ramp up their systems to match requirements posed by the new margin system. Traders can place multi-leg orders only with few brokers in the country as the requisite tools are not available with most of the brokerage houses.
What Fox Trading Solutions offers
Fox Trading Solutions offers has conceptualized the idea of basket order and has incorporated a multi-leg tool in its website since its inception. The idea behind the tool was to provide brokerage benefits to the masses. Now, with an introduction to the new margin system, traders can reap the additional benefit of reduced margin on hedged positions over and above brokerage.
Fox Trading Solutions provides a solution to place multi-leg orders from our website, directly to the broker’s terminal. You can create straddles, strangles, condors, butterflies, and a lot more using our multi-leg basket order tool. The placement of all the legs simultaneously will decrease slippage. The mass appeal to decrease the cost of business has prompted us with the idea of this utility and with the introduction of a new margin system, this has become more lucrative.
Benefits of using basket order multi-leg tool
Place up to 4 legs in one order and reduce your brokerage cost
Place all orders at one instance reduces slippage
Take benefit of reduced margin on hedged positions