Comment on Zerodha - Margin Policies

Shiva commented on 18 May 2015, 12:15 PM

Hi Nitin,

I have a question on option trading applying sophisticated techniques like deep OTM put / call spread, Iron condors etc to limit risk. However I find that SPAN margin doesn’t give enough margin benefit to make this kind of trading profitable.

The margin money I pay is my capital locked and my returns from the spread is not even sufficient to meet the costs like riskfree interest cost of my capital, taxes and brokerage etc let alone to cover the kind of risk I take.

I can probably make some money only by selling naked options which in my opinion is mindless way to trade.

I have gone through various posts of yours and I find your reasons for not giving this margin benefit for spreads like

1. What if I close the bought portion of the spread leaving the written option open,
2. What if there is no liquidity in the market etc.

You also say that unless NSE introduces spreads as seperate products, this margin benefit will not become a reality.

It looks to me that writing options is out of the reach of a rational common man.

If this is the scenario, how can we expect to see increased liquidity in the markets. People know that they’ll lose money if they enter the markets because the risk return ratio is disproportionate heavilily skewed in favor of risk. The most important part here is, western countries offer this benefit to spread orders limiting the margin requirement only to the extent of risk exposure. I believe they follow the same SPAN. How do they manage to give this benefit.

How about you brokers join together to convince stock exchanges to introduce spread products with margins only to the extent of risk. Are these exchanges focussed on cashflows they get rather than boosting the system with quality products? What is SEBI doing? In my opinion, this encourages Naked option writing which will leave the investors broke and on the road when a black swan event happens.

Unless and until such sensible limited risk, limited return products are available in the market with reasonable margin requirements, liquidity will be a distant dream.

It’s a long post and thanks for your patience to have gone through the same. I have just let out my frustration for not being a part of a sensible game.

Kindly update if you have any updates on this margin issue?

Best Regards,
Shiva.

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