Options Trading is one of the top ways to leverage the stock market. However, at times it may so happen that even after identifying a profitable trading opportunity, you cannot execute it due to a lack of funds. So, can you trade options on margin? Let’s find out!
What is Options Trading?
Options made a debut on the stock market in the year 2001. An option is a contract which allows you to deal in the derivatives of a financial instrument such as shares, currencies, commodities, etc. Under this type of derivative contract, you have the option to execute the contract for buying or selling the financial asset at a specific price (strike price) by a specific date (expiry date). You may or may not go through with the contract on expiry.
What is Margin Trading?
Options Margin trading is the act of trading options of a financial instrument in the stock market on credit from your stock broker. You can buy a financial asset with margin trading even when you do not have enough funds available.
You first need to open trading account with a broker and activate the margin trading facility. Then, you need to deposit a sum of money or pledge your portfolio’s securities with the broker put , known as the ‘margin’ that acts as the collateral for the credit. This facility helps you avoid missing out on profitable trading opportunities due to a shortage of funds.
Can You Trade Options on Margin?
Yes, you can trade options on margin. To do online options trading on margin, you must deposit a margin amount in your trading account, which the broker will use as collateral, before writing or signing any contract. The margin requirements of options vary according to the option being traded. They are determined by the stock exchanges you are trading – BSE or NSE.
The option margin requirements are complex and vary from stock margin requirements and future margin requirements. The 3 main types of margins available for options trading are:
- SPAN Margin: It is the minimum amount of margin required on an options trading app. It is calculated using the Standard Portfolio Analysis of Risk (SPAN) software, which considers the underlying asset’s price volatility and other factors to determine possible loss scenarios for the portfolio.
- Exposure Margin: It is an additional margin amount you need to submit along with the SPAN margin. This is meant to cover the stock broker’s additional risks, which the SPAN margin might not cover.
- Assignment Margin: As the name suggests, it is levied on the options positions assigned to the traders towards the contract settlement obligations.
Takeaway
Margin Trading is considered to be a useful facility which helps you execute trading opportunities for the creation and appreciation of your wealth even if you have low funds available at your disposal. Its availability for options trading is a boon for traders who wish to leverage the derivatives market for both hedging and profit maximisation.
