Last week got peak margin penalty hit in 6 figures although had maintained atleast 7 figure margin buffer everyday in a/c..nvr got a single margin shortfall notification..had no help in understanding what's gng on from broker, RM, ccare, etc
Spent the whole 3 day weekend in understanding Margin Penalty System in detail. Will put down all my takeaways for the benefit of fellow traders. Such unnecessary losses have more psychological hit than financial hit.. mainly bcoz had no clue why Margin Penalty was charged
So completely lost confidence in taking trades as was not sure .. what if i do something and tomorrow 10Lakh margin penalty gets charged. There is no way to verify anything and as usual ur broker & cc will give u std reply .. "from our side everything looks ok"
I was getting 5-10K margin penalty almost everyday but was ignoring as cost of doing business .. but a six figure penalty when I was being careful abt maintaining margin buffer and no explanation why it has been charged was shocking
First of all basic rules everyone understands and I won't be covering that .. it can be read from the NSE site
Unfortunately my understanding was that positional trades won't get affected by MPS only Intraday gets affected. That is completely wrong. You had sufficient margin when u took position but as mkt moves margin requirement for positional trades as change and can lead to MPS
Take this example, currently BNF is at 39300
Margin requirement for 4000 qty 41000CE (1700 pts OTM) is 1.9 cr but
Margin requirement for 4000 qty 40000CE (700 pts OTM) is 2.25 cr
Now if you created a position using full margin at start of day and BNF moves against you 500-1000 pts (pretty normal), you will have a peak margin shortfall of 2.25-1.9=35 Lakhs and penalty of 1% 35,000 Rs. So what was fine initially can go way out of control in 2-3 candles
Margin Penalty for trades gone right .. yes possible by the magic of SEBI ..
say u used full margin and bought tata motors for 1 cr
tata motors went up 20%
now ur margin requirement will also go up 20% and 20L will be considered as margin shortfall and margin penalty of 20K
from here onwards more u gain .. more margin penalty can be charged to you. Completely against the core principle that penalty is for reducing the risk .. more u gain, ur risk is actually lower .. but still u can be charged margin penalty.. if this is not moronic .. what is?
Can this happen in FnO? .. yes
Say you r completely short on CE directional
Mkt crashes
Vix spikes
Margin requirement goes up not only for PE but also CE..
and u r screwed again for being right..
Your short CE positions can attract huge margin penalty in a crashing mkt!
This Zerodha article explains another scenario where using cash proceeds from sale of equity holding for intraday trading can lead to Margin Penalty
Note that these are just the repercussions for intraday and overnight trades, the impact on multiday recurring penalty is even more severe.. can lead to complete wipeout
This 5Paisa article explains Margin Penalty risk in other scenarios like using calendar spreads and hedged positions
Now let's look at the snapshot lottery system.. CC takes min 4 random snapshots per day and penalty is charged on the peak shortfall across all snapshots .. explained well in this paytm article
effectively what this means is that u cud be abusing the peak margin penalty full day and escape the penalty if it is not randomly captured by CC snapshots and u cud get f***** if ur peak margin falls short even for a second in a day and snapshot gets taken at the same time
Congratulations to SEBI & NSE on making stock market truly a game of luck !..it all depends on when ur positions got snapped by CC.. u either get f***** for a momentary mismatch not even ur fault and u cud escape after completely r***ing the system & making huge gains frm it
Add to that what is the guarantee that snapshots r really random.. what if CC is taking snapshots exactly when VIX spikes to collect maximum penalty.. who knows? Indian mkt is now a true & complete casino in the absolute and literal sense.. thanks to the fools running it
Now if u r thinking that I never got margin penalty..ppl r doing unnecessary rr on SM..remember it is a matter of luck & time.. this time I got hit.. u cud be next.. anytime..pure luck..there r clear scenarios where ur prft/loss cud be 1L and margin penalty 10L/1Cr/anything
now a word on transparency..first of all it being a random snapshot based system..there is a clear loophole..no one has a f***** clue on when what will happen & hence no-one owes u an explanation for anything..it is what it is.. accept or jump off the building..no one cares
Another thing, the Margin Penalty can be settled upto T+5.. so when u get a penalty charged it cud be due to anytime on anyday in the past 5 days.. practically impossible to figure out or cross check
Now few points on how to avoid it? Obviously hedge ur positions to reduce the margin requirement w/o increasing ur position size. OTM hedges r extremely expensive these days..u hav to pay min 5-6 Rs for hedge ..considering most traders write 20-30 range premium that is 25%..
If u increase the position size with hedges then obviously it is of no use.. u will again become vulnerable to Margin Penalty.. increasing position size with hedge is actually more risky.. bcoz margin increase exponentially with position size when thngs go wrong..
Second strategy to avoid MP.. don't hold positions when mkt moves more than 400 points.. exit and create new positions later.. good strategy.. everytime you do this u will lose large amt of premium collected and be left with pennies in the end..
Third Strategy.. move closer to ATM to compensate for hedging costs.. reasonable.. but closer to ATM means more frequent SL hit and u will hav to closely monitor ur positions full day.. basically life will be reduced to just watching BNF tick by tick.
Note that if MP system is followed fully instead of just based on 4 snapshots..current rules makes option writing practically impossible..u r able to still trade only & only bcoz u r escaping the owed penalty in those 4 snapshots..but that also means u cud get hit anytime
Another issue..compared margin calc across 3-4 brokers.. all giving different results..which means ur broker cud allow you to take certain position for given margin.. but CC may claim higher margin is needed for the same position and may charge penalty for it..no std mrgin calc?
Margin Penalty Case due to physical delivery settlement
Can a buy trade of 15000 Rs result in over 4 Crore transaction value and a loss of over 15Lakhs? here is a case study from twitter
- Trader bought 45150 qty at .35 paisa PE options in Hindalco 450 strike.. trade value=15802 Rs
- Hindalco closed at 449.65 making his option position ITM on expiry
- As per new rule ITM options need to be compulsorily settled with physical delivery
- Trader did not have a single hindalco share to deliver against the ITM put position
- exchange/broker initiated the physical settlement transaction for the trader by buying 45150 Hindalco from market at 472 in his account .. trade value 45150*472=2.1 Crore
- This will be settled against his 450PE option strike, so net loss in physical settlement=45150*(472-450)=9.9 Lakhs
- Transaction charges including buy + sell = ~4.5 crore will be over 1 Lakh
- Margin shortfall in account = 2.1 Crore will attract margin penalty at the rate of 1% per day and can go upto 5% after 3 days .. so this will come to around 2 Lakhs to 10 Lakhs ..
- Total Loss incurred by the trader for a 15K trade = 9.9L + 1L + (2L-10L) = anything between 13Lakhs-21Lakhs ...
He will get to know the final number on Wednesday .. all this happened on 30-31st Dec .. so a very horrible start to new year for him..
Stock market is extremely technical and complicated these days .. its far from bought something / sold something and became a millionaire headlines that we read everywhere .. i know lot of ppl who jumped into stock market last year .. made good money using small capital on gut feeling and random trades and now want to try cryptos and go big bang in markets .. understand the risks .. i also know lot of got completely wiped out stories like this .. even in everything up raging bull markets of 2020/2021 ..
PS I hav worked last 3 days full time to figure out some possible workarnd.. this thread is to just alert you.. u can get f***** anytime by NSE & SEBI and u can't do anything abt it.. happy trading !
