NSE (National Stock Exchange) recently increased it’s margin structure in options segment. In index options it is almost double. Our regulator(SEBI) and exchanges are of the view that due to high volatility in coming days the margin structure needs to change in their risk management framework.
Is this good or bad?
Intuitively bad for option sellers, and if it is bad for them then it must be good for buyers in that case.Let’s analyze this further to derive a conclusion.
Increase in margin will increase working capital requirement of option sellers.For index options margin have doubled(almost). 1 lot of nifty OTM option selling required a margin of around 35k which currently stands at 60k. So my return on my investment will go down substantially as my working capital increased. But why?
What happens when the consumer facing FMCG companies sees their raw materials’ prices increasing.
- Pass it on to the consumer so the profitability remains same.
- Bear the cost,take a hit on profits.
- Innovate.
Similar is the scenario currently in option selling world. Some traders will sell options only where they find opportunities, shift their focus more on money management. Some will still continue their existing pattern to trade, and adjust as per market returns.Some will innovate new methods.
Few things that i believe may happen:
- High margin will lead to high cost of capital and in turn will increase volatility. And this will invite/shift players to adopt to intraday model of trading.
- Option buyers will have good time for sometime before sellers adjust to higher premiums.
- In coming days we may see our regulators’ heart melt towards option strategy players and allow cross margin benefit for strategies. And if that happens a lot of innovations from the broking, software, and indore based service providers too :).
Increased margin will remind sellers to charge higher premium ;but will that happen instantly is something i don’t see.Players will shift to seek higher premiums gradually till a shock arrives in markets.
Scalpers are going to have good time for sometime as volatility should remain high. High volatility brings in all type of participants to options platform, and it is only then a lot of innovative ideas takes shape. Option writers need to build data backed innovative methods to keep up with markets.
Happy Trading!!
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