A lot of us when in a trade would probably do one of the 2 things below.
For example: I will consider that the margin for Nifty futures is Rs. 28000 and my account balance is Rs. 30000. I have bought 1 lot of Nifty futures at 5900.
1. I place a stop loss order at 5850 and place a profit target order to sell at 6100.
2. I place 1 profit target order to sell at 6050 and 1 fresh short order at 6050 as I believe the price will come down once it touches this price.
The confusion for the above 2 cases usually is: “Can it be done without any extra margin being blocked?” I will explain how it works with the above example in mind.
Do remember that in your Rs. 30,000 capital about 28,000 is blocked because you have bought Nifty futures. Only Rs. 2000 is remaining for a fresh position.
Firstly, in both the cases above, when you are holding a Nifty future, the first exit order that you place doesn’t require any margin because exchanges recognize that you are trying to exit a position that you have and there is no margin requirement for such an order.
When you place the second exit order, there is a notion among traders that for this order you will require complete margin in the example above, i.e. another 28,000 apart from the original 28,000 blocked for the position you hold.
This is a notion, not True!!!
When you place the second exit order in both the scenarios above, as long as your margin is more than Rs. 28,000, you will be able to place an order. But remember that if your balance is exactly Rs. 28000 or lower, you will not be able to place the second exit order, it would display an error saying you’re short of margin.
Hence in the example above, you have Rs. 30,000 in your account out of which Rs. 28,000 is blocked for the Nifty future you have bought and even though there is only Rs. 2000 extra in your account you will be able to place the second exit order for both scenarios mentioned above.
Why don’t you need the extra 28,000 for taking the second exit order?
The exchange recognizes that your second exit order will be executed only after the first one is executed. If the first exit order is executed, that means that the margin which is getting blocked for your present position gets released which is sufficient for your second exit order.
This logic will work for equity, equity futures, commodity futures and currency futures. This would not work when trading options. The reason it will not work when trading options is because unlike in equity trading and futures trading, the margin required for buying and writing (selling) options varies. If you have Rs 5000 in your account and you bought 1 lot of Nifty calls at Rs 100 (Rs100 x 50= Rs 5000), you can place the first exit order, but for placing the second exit order it will ask you for the option writing (selling) margin.
Hopefully the above information clarifies. Do ask a question if you need further explanation.