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Sep21-W3: Trading option spreads is confusing in this SEBI’s world

With great enthusiasm, I bought hedges against short options on Monday. The whole idea was to trade more number of lots. The downside was additional brokerage and bearing sunk cost of hedges. I had a hunch that the payoff would be bigger.

After buying 700 quantities of hedges for calls, I decided to sell some additional call options. However, I hit my margin limit and could only manage a total of 600 quantities on short side. Now, it was the turn to do the same trick on put side.

However, Zerodha blocked me to buy hedges for puts. I kept getting this error that buy orders are blocked due to OI limit prescribed by SEBI. I tried all permutations and combinations but to no avail. I then turned to my know-it-all wifey who explained that Zerodha’s algorithm is perhaps factoring the extra hedges which I have on the call side.

To test the theory, I exited the extra hedges on call side and voila, I was now able to buy put options. I was dumbfounded by this and wrote them a tweet to seek explanation. I did get a reply with the same reason that my wife gave me.

I am however dissatisfied with the reply. It is impossible to know beforehand how much margin will option spread trading or iron condor really need. Zerodha’s margin calculator does not have facility to compute weekly option margins. For the same set of positions, I cross-checked margin requirements on Opstra and Upstox. Surprisingly, the margin requirement values were different.

How can margin requirements differ from broker to broker? Isn’t there a standard prescribed formula by SEBI? To mess things further, SEBI gives a SPAN file 5 times a day to broker and margin can vary by a lot during the day.

How am I supposed to know capital requirement for trading? The only solution for now is to follow cycle of sell some options à buy hedges à sell more options à buy hedges and so on. After each cycle, keep checking if my margin is within limits. While the approach may work for optimally using my margin, it is a disaster in terms of cost as I will end up paying a lot of brokerage.

Is this how SEBI envisioned the process of weekly option trading? Is this how a retail trader is supposed to work and that too after paying enormous tax for all of this? While Zerodha has an alternative based on its tie up with Orbis, I stand to lose my facility to pledge holdings. All this is very discouraging, to say the least.

1 thought on “Sep21-W3: Trading option spreads is confusing in this SEBI’s world”

  1. Pingback: Sep21-W4: Nifty mean reversion trades give me highest ROI till date

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