By Vineet Kumar 
Margin Requirements for Hedged Trades Up by 80%—What’s the Logic?
I recently experienced a frustrating change in margin requirements that has left many traders scratching their heads. I was holding an iron condor position with a margin requirement of ₹35 lakh. After SEBI’s latest regulations kicked in, the margin jumped to ₹62 lakh—an 80% increase! And this is for a fully hedged position where my maximum loss, in the worst-case scenario, would be ₹5-6 lakh. How does this make sense?
The intent of these changes was supposedly to curb speculation, particularly in naked option selling and fast intraday trading. But it feels like hedged strategies, which are inherently designed to limit risk, are now being treated as gambling. Why penalize traders who follow a disciplined, risk-managed approach?
Initially, I thought this might be a broker-specific issue. But after checking with multiple platforms like Zerodha and 5paisa, I realized this is a broader issue driven by SEBI’s new rules. An additional 2% margin is being blocked on all short options, regardless of whether the positions are hedged or not. This change is part of SEBI’s directive to increase “tail risk” coverage on expiry days.
The 2% Rule and Its Impact
Under this rule, an extra 2% ELM (Extreme Loss Margin) is being charged on the entire contract value. For example, if Nifty is trading at 23,000 with a lot size of 25, the additional margin for a single lot is roughly ₹12,000-13,000. Multiply that across multiple lots, and the numbers start to hurt.
From February 1st, things will get worse as the calendar spread margin benefit will be removed for contracts expiring on the same day. This means even tighter liquidity for traders who rely on these strategies.
For traders like me, who carry iron condor positions across weeks, the rule is absurd. Imagine you’ve been holding a 23000 PE sell with a 22800 PE buy for a month. By expiry day, the premium has decayed, and the market is nowhere near your strike prices. Your position is tightly hedged, and the risk is minimal. Yet, you’re now asked to double your margin requirements just because it’s expiry day. How is this logical?
A Global Perspective
SEBI’s move stands out when you compare Indian markets to global counterparts. In most developed markets, hedged positions enjoy significantly lower margin requirements because they inherently reduce risk. But in India, we were already paying higher margins, and this new rule has made things infinitely worse. Traders are now questioning whether SEBI fully considered these scenarios before implementing the changes.
Suggestions for SEBI
1. Reevaluate Hedged Margins: SEBI should review the existing disparity in hedged margin requirements between India and other countries. For hedged positions, margins should reflect the actual risk, not blanket policies.
2. Address the 2% Rule’s Flaws: Did SEBI intend for the rule to be this burdensome? If not, they should exempt hedged positions or reduce the impact of this rule.
3. Consider Carry-Forward Positions: Margins should account for when a position was initiated. Long-term positions with decayed premiums and minimal risk don’t warrant such high margins.
4. Grace Period for Adjustments: Traders need clarity and time to adjust their positions when margins change. Brokers shouldn’t square off positions the moment markets open.
A Trader’s Perspective
The implementation feels rushed and detached from the realities of trading. Imagine sitting in a regulatory meeting with officials sipping bottled water, far removed from the intricacies of the market. Their rules don’t account for strategies that aim to reduce risk, nor do they reflect an understanding of how liquidity and hedging work.
Closing Thoughts
This isn’t just about margins—it’s about how these policies shape the Indian derivatives market. By targeting all short positions indiscriminately, SEBI risks alienating serious traders while failing to curb speculative behavior. The community is urging SEBI to consult with stakeholders and rethink these rules to strike a balance between risk management and market competitiveness. Until then, traders like me will have to navigate these turbulent waters, hoping for a fairer system.
