Futures and options are financial instruments that allow you to speculate on the expected price movements of underlying assets.
A future is a contract between the buyer and seller to trade the underlying asset at a predetermined price and date. In contrast, an options contract grants the buyer the choice, without any obligation, to purchase or sell the underlying asset at a specific price before the contract's expiration.
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Delivery margins play a crucial role in the increased margin requirements near expiry.
They are imposed on all possible positions that can be physically delivered, beginning four days before the expiration date. They are applicable even if no charges are incurred during the acquisition of such positions. This continues until the positions are squared off before expiry or settlement is completed after expiry.
As F&O contracts near their expiry date and approach physical delivery, their required margins increase proportionally to their contract value. This is because physical settlement requires the actual delivery of the underlying asset. Hence, higher margins are blocked for F&O trades to ensure that you have sufficient funds to fulfil your obligations in case of physical delivery.
The calculation of delivery margins depends on the margin rate applied in the cash market segment for the specific security. Failing to maintain these margins in your trading account when imposed can result in a deficit in your margin balance.
Delivery margins are lowest on Expiry - 4 and gradually increase every day until Expiry Day. They are levied in a staggered manner as follows:
Expiry - 4: 10% of computed delivery margin
Expiry - 3: 25% of computed delivery margin
Expiry - 2: 45% of computed delivery margin
Expiry - 1: 70% of computed delivery margin
Expiry Day - 100% of computed delivery margin
Computed delivery margin = VaR + ELM + Ad hoc margin
Increased margin requirements can affect you in several ways:
To effectively manage increased margin requirements, you can consider the following strategies:
Higher margin requirements for F&O trades close to expiration are essential to risk management in the financial markets. You must understand its reasons and implementing effective strategies to manage increased margin requirements. This way you can continue to participate in F&O trading while minimising the potential impact on your overall trading performance.