Higher the risk, higher the margin requirement. Remember, the critical margin dynamics – the lesser the risk you carry, the lower the margin requirement. So what does this mean to you as a trader? Now, think about this – if your capital loss is minimal, then it implies that the risk for your broker is also minimum right? Now, if the risk for the broker reduces, it also means the risk for the exchange reduces. However, if you hedge your position, then the risk of losing capital reduces drastically. The risk of market-moving against your position, causing capital erosion is high. In the same way, a naked futures or options position in the market is like riding a bike without wearing a helmet. The helmet acts as a hedge against a potential disaster. Given the crash, what is the probability of injuring your head? Low probability, right? Because the helmet protects you from an injury. Now imagine the same situation, but instead of being carefree, you decide to wear a helmet. What is the probability of injuring your head? Quite high given the fact that you are not wearing a helmet. Suddenly you come across a pothole, you slam the breaks to cut speed, but it’s too late, you crash and fall. What is a hedged position you may ask? Well, we have discussed this several times in this module, but for the sake of completeness of this chapter, we will quickly discuss this again.Īssume you are riding a bike at 75Kms per hour, without wearing a helmet. Starting 1 st June 2020, NSE’s new margin framework is live, which essentially brings down the margin requirement for the hedged position.
These are fascinating times we are living in, especially if you are an options trader in India 🙂
0 kommentar(er)
