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Understanding Margin Trading

Find Answer. What is an Options Margin Call? A margin call can be triggered for a variety of reasons, but the most common reasons are: A position moves against you, thus increasing your potential obligation under the Options contract. ASX Clear increases the margin requirement on your positions, or alternatively reduces the collateral value allowed on your shares lodged as cover.

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How margin trading works, and why it's usually a bad idea.

How are margins calculated on my Options account? Below is a summary A short position in an option refers to selling an option. You can sell a call or put option depending on your view of the market. Their total income is the premium but their losses can be unlimited in case the price moves against them. Their total income is the premium received but their losses can be unlimited in case the price moves against them. In terms of margining, the seller of the option is subjected to all the regular margins that a buyer of seller of the futures is subjected to.

Margin Requirements - Canada | Interactive Brokers Canada Inc.

The only difference is that the margin requirement in the case of the seller of the option is adjusted to the extent of the premium received when debiting to the trading account. To that extent, the seller of the option pays lower margins compared to the trader who is long or short on futures of a similar contract.

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One of the basic differences between forward contract and futures contracts is that forwards carry counter party risk. That means, if one of the parties to the contract defaults on his side of the obligation, then the other party is put in a tight spot and may have to adopt a prolonged legal route.

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That problem is solved in case of exchange traded futures, In this case, the Clearing Corporation guarantees each trade by becoming the counterparty to every trade on the currency futures and options segment. The Clearing Corporation in this case acts as the counterparty and also the guarantor of the trade. If one party defaults, the Clearing Corporation will honour the other side of the trade so that exchange mechanism is not impacted.

Then the exchange will recover the losses from the defaulter. That raises a very fundamental question; on what basis does the clearing corporation give such a guarantee. Any such guarantee has to be backed by a large pool of funds.

Buying & Selling Stock

Let us look at this concept of SGF in greater detail. The SGF is intended primarily to guarantee completion of settlement up to the normal pay-out for trades executed in the regular market and will not act as guarantee for company objection cases i. It only guarantees good trades in the normal course of business.

That is normally not required. The SGF is purely a financial backing to give confidence to the market and the participants that in a worst case situation there is a corpus to fall back upon. As a result, the investor is not affected in case the counter trading member fails to meet his obligation since the Clearing Corporation of the NSE and the BSE guarantees the net settlement obligations.

All contracts in the currency futures market: in the case of rupee pair futures, rupee pair options, cross currency pair futures and cross currency pair options are all necessarily settled in cash only. The settlement takes place in the following forms. The positions in the futures contracts for each member are marked-to-market to the daily settlement price of the futures contracts at the end of each trade day.

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The CMs who have suffered a loss are required to pay the mark-to-market loss amount to clearing which is passed on to the members who have made a profit. This is known as daily mark-to-market settlement. Theoretical daily settlement price for unexpired futures contracts, which are not traded during the last half an hour on a day, is currently price computed as per a pre-defined formula. After the daily settlement, all the open positions are reset to the daily settlement price. The mark to market losses or profits are directly debited or credited to the CMs clearing bank account.

Open positions in futures contracts cease to exist after their last trading day. In case a trading member wishes to take additional trading positions his CM is required to provide Margin deposit to Clearing Corporation.