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Doubts Cleared on Selling of Options and Margin on Nifty BeES

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In short: Selling of options on paper is unlimited risk so brokers block a huge margin as regulated by market makers. 100% margin is given against Nifty BeES holding to trade derivatives. Read to know more in details.

I get too many questions on selling of options. Some traders are sacred selling options and some do not sell options because they think a lot of margin is blocked.

If a lot of margin is blocked then there is a reason. Selling of options on paper is unlimited risk. So brokers have no other option but to block a huge margin as regulated by market makers.

Do not worry brokers will not run away with you money. Margin blocked is done for their own safety, else if there is a huge loss they will have to pay from their pockets. Which obviously they do not want.

Once the sold option is closed then your blocked margin is released.

Remember that other than option buy all derivatives trades must be hedged if you are taking an overnight position else a breakdown of 4-5% can cause unbearable loss to your trades.

Here is another confusion.

I got an email asking this question:

Dear Dilip,

Thank you very much for these sort of guidance.

I need to know couple of things from you. Could you please help?

A) Suppose I have sold say Put at 10400 Nifty. Imagine during the month (before expiry of the contract in that month), Nifty moved below 10400, meaning the sold call became In The Money (ITM). Can I wait till expiry & imagine at expiry date, Nifty rebounded at say 10500. So, in that case, I will have little profit/less loss?

Am I right in my understanding? During the month, even if ITM, contract will not be expired – right? Please correct my understanding.

B) Can I buy Nifty BeES (or any Nifty ETF) & trade against that money? How much leverage I would get if I want to intraday? Suppose, I have Rs. 5 Lakhs Nifty Bees in my trading account. How much margin broker would give me for intraday trading approx.?

Thanks a lot again….

Thanks and regards,
Name Withheld

My reply:

A) Suppose I have sold say Put at 10400 Nifty. Imagine during the month (before expiry of the contract in that month), Nifty moved below 10400, meaning the sold call became In The Money (ITM). Can I wait till expiry & imagine at expiry date, Nifty rebounded at say 10500. So, in that case, I will have little profit/less loss?

It will be profit as the Put you sold will expire worthless – but when it goes ITM you are sitting on FIRE. Better exit.

Am I right in my understanding? During the month, even if ITM, contract will not be expired – right? Please correct my understanding.

On expiry time 3.30 pm only option final prices are decided. If ITM then even if for entire period it was OTM still it will be declared ITM and vice versa which means if after you sold it went ITM (In the Money), but on expiry day it went OTM then that option will expire worthless.

In India you are not forced to carry an option trade till expiry as they are cash settled. You can exercise (close) an option trade any time before expiry.

So if you sold an option and it has gone In the Money (ITM) you should exit immediately – means you should close the position and take a stop loss.

B) Can I buy Nifty BeES (or any Nifty ETF) & trade against that money? How much leverage I would get if I want to intraday? Suppose, I have Rs. 5 Lakhs Nifty Bees in my trading account. How much margin broker would give me for intraday trading approx?

If you bought Nifty BeES for 5 Lakhs then as far as I know most brokers in India give 100% collateral margin against Nifty BeES without charging any interest. Note that for stocks brokers give up to 80% collateral margin and do not charge any interest on 50% of that. However for Nifty BeES 100% collateral margin is given without charging any interest on the full margin.

Nifty BeES is treated as cash holding. If you lose in option sold or future trading traded in that collateral margin – some holdings of the Nifty BeES will be sold to recover loss.

If you are an option buyer/seller and you are making huge losses its because you have no planning and not hedging your trader. If you want to learn proper trading strategies you can do my course and learn conservative ways to trade Nifty & Bank Nifty options.


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About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

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