How to determine the margin for hedge positions?
When trading hedge positions, understanding margin requirements is key to managing capital and avoiding order rejections. A hedge strategy typically involves taking offsetting positions—such as buying one option and selling another—to reduce overall risk. Here's how margins are calculated in such scenarios.
Example Hedge Setup
Let’s say you’re executing this strategy:
- Sell (Short) NIFTY 22600 PE — In-the-money (ITM) option
- Buy (Long) NIFTY 22500 PE — Out-of-the-money (OTM) option
In this case:
- The unhedged margin to short NIFTY 22600 PE = ₹70,149.92
- After buying the NIFTY 22500 PE as a hedge, the required margin drops to ₹14,995.92
- Span Margin: ₹2,567.13
- Exposure Margin: ₹12,428.79
- Margin Benefit: ₹55,154
This significant reduction happens because the bought option limits your risk, and the risk-based margin framework adjusts accordingly.
Important Notes
- The margin shown in the image excludes the margin required to buy the hedge leg (22500 PE). You need to add the buy leg margin separately to get the accurate total margin.
- To avoid order rejection due to insufficient margin, always execute the buy (hedge) order first.
- You can also use the Basket Order feature to see the combined margin impact before order placement.
Important: Always execute the hedge leg first or use Basket Orders to avoid margin shortfalls and rejections.
To know more, refer to this article: Order-Level Hedge Benefit via Basket Orders
What if...
| Scenario | Outcome |
|---|---|
| You place the short leg before the long leg | Order may be rejected if full margin isn't available |
| You execute the hedge leg first | Margin benefit is applied immediately |
| You use Basket Orders | Combined margin calculation is auto-applied for seamless execution |
| You forget to include the buy margin | Total margin required will appear lower than actual; trade may fail |
Last updated: 27 Jun 2025
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