The concept of margining is that you have to put cash as a margin against your futures or written options. Now to calculate what margin you need, NSE would calculate the net open position in every stock or index, by offsetting, for instance, futures along with options.
Read: Futures and Options, an introduction
So a Reliance Future position at Rs. 880 (Lot size: 250) could need a 20% margin, or Rs. 176×250 = Rs. 44,000 per lot. But if you have bought a put option on Reliance at 900, then the downside is protected, so your margin requirements can be brought down substantially. NSE will offset the two and ask for a lower margin, of say Rs. 15,000 per lot. This saves you cash.
Margining offsets can also be between futures. If you’re Long November futures and Short December futures in L&T, your net margin will be considerable lesser than if you had either of those positions in isolation.
The concept of cross-margining is that positions can now be offset between segments. The “cash” segment – where you own stocks in your demat account – can now be offset against corresponding futures. For instance, I might own 250 shares of Reliance. And then, I might write a call option on Reliance at Rs. 900, on the basis that it won’t cross Rs. 900 this month, and I’ll earn some premium from my position.
If cross-margining weren’t allowed, I would have to provide more money against the call option. This is inefficient because there is no real reason for that margin. I already own the shares, and thus if the stock goes up beyond Rs. 900 my shares can be sold to provide cash. Below 900 there is no risk to my call option position (since the option will expire worthless).
With cross margining, I can provide my Reliance shares as margin, which is a “cash segment” position, against the call option which is a “derivatives segment” position.
Cross margining is allowed for stocks against stock futures/options, and stocks against index futures/options. If you’re long Reliance, ITC and ICICI Bank, and short the Nifty, your stock position offsets nearly 20% of the Nifty position (by weight), so margins will be that much lesser.
ETFs weren’t allowed to be considered for cross-margining till November 2013. That is now changed with this circular.
What is ETF margining?
The National Stock Exchange (NSE) has allowed cross-margining on Exchange Traded Funds (ETFs) based on equities. Exchange Traded Funds (Read more about them) are basically mutual funds that buy and sell stocks, and the ETF itself is bought and sold on the stock exchange.
You can buy a Nifty ETF (NiftyBeEs by Goldman, IIFLNIFTY by IIFL), and offset it against a Nifty short position (Short Future, Short Call option). You need at least 500 of the Nifty ETFs, each of which is 1/10th the value of the Nifty.
You can also do this with Junior Nifty (JUNIORBEES). But this doesn’t seem to apply to all other ETFs, like BankBEES (on the Bank Nifty).
Different brokers do things differently, so confirm with your broker. For Zerodha (a broker I use) I have to give them an offline demat transfer instruction to move the stocks into an account they can margin with. Other brokers might store your stocks in a pool demat by default. You might also need to fill a form that allows you the cross margining facility.
How Does Cross Margining help?
- Write covered calls more efficiently. I don’t need to put more cash down. If I own a stock I can write call options to get some “income” from the positions.
- Reduce cash required on F&O positions if you have long term stocks in your demat account.
Hope this helps!
