Margin for Options

Hello everyone, welcome back. Hope you all had a great time during Diwali. I was back in Pune yesterday night and was waiting eagerly to get back to writing ways. Surprisingly, even during the vacation... thought of writing couple of times. Hope that's a good sign.

Anyways, have to keep Support and Resistance post on a hold for the time being. Reason is, along with Support and Resistance level, we will also discuss trading strategies depending on them. These strategies will necessarily involve selling options at times for which it is imperative that we understand how margins work for Options. Hope all of you have gone through the Margin Post on Futures Blog as we will use that as baseline here.

As we have seen in Futures Blog, margin consists of two parts - SPAN and MTM. However, in case of Options, it is different due to the inherent difference between Futures and Options. While both parties are bonded by Futures contract and have obligation to settle it; in Options only seller has the obligation. Buyer of Option has the right but not the obligation to fulfill his side of the bargain. So obviously no cracker or Diwali sweet for you to guess that a buyer of the Option does not have to pay any margin. He pays the premium upfront and that is as much deep as he can sink in it.

However, a seller (Option writer) receives the Premium for writing the Option. This premium is added to margin requirement and just like in case of Futures; it is calculated daily. If you recall the Option Pricing posts (this and this), Premium already covers the Intrinsic Value of underlying or in other words Mark to Market component. Not to forget, it also covers the volatility component within the Premium. This means premium of the Option theoretically covers SPAN as well as MTM part of contract. So if premium goes north/south, your margin requirement changes accordingly which you have to oblige. There is no MTM or SPAN as it is not needed and you have to make sure that the you keep the margin equal to or more than the current premium of the contract in the market. Another no brainer is that Margin does not go to ridiculously low levels even if Premium approaches zero as there is a minimum margin (Short Option Minimum Charge) that you have to keep with the exchange at all the times.

Will write more on Margin on Futures Blog in a while. Don't forget to read and comment. Also do let me know if you have any questions.

Welcome back once again... let's ride.

Happy Diwali

Rather than writing more about Support and Resistance as I said in the last post, today’s post is just to wish all of you and your loved ones a Very Happy, Joyous, Prosperous and Safe Diwali.

Also if you want to read something today please see my new post about Margin on Futures Blog and on Japanese Candlesticks on Equity Blog. Needless to say, will wait for your comments.

Next post will be on finding Support and Resistance again. It will be followed by long overdue post on Margin Calculations. For both these posts, it will be important for you to go through the posts on these two blogs. We will be using them as basis of our discussion.

Once again, wish you a Very Happy Diwali. Have a rocking time.

Support and Resistance Levels... without Charts

In the death overs of last post I said something about Supports and Resistance without charts... let’s see how we can do that.

Just a small detour before we get to that. As you guys know that I cannot and do not want to trade from office as far as possible. I can call up the broker if some really really great opportunity knocks but it has not happened so far. I only look at the market trend and do the predetermined trades based on homework a night before. I miss the college days for that freedom...

The point here is because of my inability to track the market hourly or daily… I work with weekly levels. I decide the Supports and Resistance based on weekly charts and accordingly open the trades. I try to close all my positions on Friday and start new positions on Monday. Another thing is I am not a compulsive trader... it is very dangerous thing to be and I will talk about it on Equity Blog. So I trade when I get the risk-profit ratio in my favor or suiting to my appetite or otherwise I simply let it pass.

Coming back to main objective of our post, I will explain how to find out Support and Resistance levels for the week based on data of previous week (disclaimer: I do not use this system anymore and prefer charting and hence have not used it for a long time).

First step is to find out Average Level of NIFTY for the week gone by and it can be done as below;

Avg Level = Avg (Highest Level, Lowest Level, Weekly Close)

From this 4 data points(3 levels of NIFTY and Avg Level as calculated) we can get Support and Resistance as below;

Support = 2 x Avg Level - Highest Level

Resistance = 2 x Avg Level - Lowest Level

Let’s see the illustration for the last week;

Highest Level = 5160.25 (Monday)

Lowest Level = 5011.05 (Tuesday)

Weekly Close = 5049.95

Avg Level = 5073.75

Support = 4987.25

Resistance = 5136.45

Have to rush someplace so follow up, comparison with charting levels, trade as per these levels and more in the next post.