Efficiently Squaring Off Hedged Positions in Futures Trading

How to efficiently square-off order-level hedge positions?

While squaring off your hedge position you are required to close the Sell order first of the option before squaring off the Buy order.

When dealing with hedged positions such as a Bull Put Spread, it is vital to square off orders in a manner that aligns with margin requirements and avoids trade disruptions. Here's how you can effectively manage this:

Suppose you have executed a Bull Put Spread by going long on an Out-of-the-Money (OTM) Put Option at 14950 and short on an
In-the-Money (ITM) Put Option at 15200. This hedged position has differing margin requirements for each leg. If you try to close the long position first, which typically holds a lower margin, you may be met with an order rejection. This is because the short position, which demands a higher margin, still remains open and might not have enough margin left to support it alone.

The recommended approach to unwinding such positions is to first close the short position, which is the 15200 Put in this example. Closing the higher-margin leg of your spread reduces the risk and ensures that adequate margin is available. Once this is done, you can then safely close the long 14950 Put position.

By following this sequence, you can prevent order rejections that may occur due to insufficient margin for the remaining open position. This practice is not specific to any particular exchange but is a general strategy for maintaining margin efficiency and order integrity for any hedge positions.

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