Order Level Hedge Benefit3 min read
Owing to an exchange-wide change in margin requirements, margin requirements for hedged positions have been reduced by almost 70% as compared to earlier.
Before we proceed further, let us understand the concept of hedging in nutshell. Hedging is nothing more than another type of investment that protects you from incurring financial risk from an unwanted event like a decline in the stock price. This is an advanced risk management tool where a counter position on an asset is taken, such as buying shares of a company and selling futures on that company.
Paytm Money has now introduced Order Level Hedge Benefit, where you are required to maintain a reduced initial margin by getting into a hedge at the order level. You can now benefit from a reduced margin from the initial stage.
Paytm Money’s Margin Calculator will guide you through the updated margin benefit journey.
Two ways brokers use to provide hedge margin benefits to the trader-
Trade Level Hedge Benefit
Order Level Hedge Benefit
Trade Level Hedge Benefit?
To benefit from a hedge, traders are expected to hold two counter positions, and the benefit is been credited only after the orders have been executed.
The margin requirement is high in such hedged trades as orders cannot be executed if the required minimum margin isn’t available in the trading account.
It’s only when the trade gets successfully executed after meeting the required margin criteria, the benefit in terms of saved margin amount due to hedged positions will be transferred back to the trading account.
Let’s break the term down with the help of an example-
If a trader sells one lot of Nifty 30 June 17100 CE for ₹100000 and buys one lot of Nifty 30 Jun 17000 CE for ₹20000 then the total margin required for such trades would be ₹120000, and once the trade gets executed, only then the saved margin amount of say ₹100000 would be transferred back to the trading account.
And to get into another trade, the trader again has to maintain the same ₹120000 in the account.
Order Level Hedge Benefit-
As per the new margin policy of NSE, introduced in 2020, the margin requirement for naked F&O options increased, however, traders can reduce the margin paid dramatically by ~70% if they go for order-level hedging, in which case, a trader again has to take two counter positions just like trade level hedge, but this time sequentially to reap the benefit of saving on margins.
Referring back to the above-given example, if a trader sells the 1 lot of Nifty 30 Jun 17100 CE then the margin required is ₹100000 in the earlier case, but in the Order Level Hedge process, the trader has to buy the one lot of Nifty 30 Jun 17000 CE first by simply paying the premium amount i.e. ₹20000, also known as the hedge position, and then goes on to Sell the Nifty 30 Jun 17100 CE, the risk-management system would allow the trader to take the short position at the reduced margin, thus freeing the unused margin amount to take another position.
In the Order level hedge process, traders can take up to 4 pairs of positions in the same margin amount as that in the trade level hedge process.
Note: Only caveat to this process is that the trader should never close the Buy position first (hedge position), but rather close the short position first, as it is the highest margin position.
In case, the trader closes the Buy position first (hedge position), then there may be a peak margin shortfall penalty from the exchange.
Please note, that there may be changes in the required margin anytime by the exchange.
Don’t forget to check out our detailed blog on Margin calculator:
Disclaimer: Investments in the securities market are subject to market risks, read all the related documents carefully before investing. This content is purely for information and investor awareness purposes only and in no way to be considered as advice or recommendation. Paytm Money Ltd SEBI Reg No. Broking – INZ000240532. NSE (90165), BSE(6707) Regd. Office: 136, 1st Floor, Devika Tower, Nehru Place, Delhi – 110019.