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Margin Calculator

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Forward Market

• Forwards market
• Futures contract
• Future trades
• Leverage & payoff
• Margin & M2M
• Margin calculator
• Open interest

• How to short
• Nifty futures
• Nifty futures
• Futures pricing
• Hedging with futures
• Notes

learning sharks stock market institute

The trade Information

This chapter will begin with me asking the same old question once more: Why do you think margins are charged? Let me post the solution before you become irritated and chase after me.

 

From the standpoint of risk management, margins are charged. It aids in avoiding any unfavourable counterparty default. The whole risk management is supervised by the broker’s risk management system, also known as the RMS system.

 

You might find it interesting to know that the RMS is a computer programme. All customer orders only reach the exchange when this software approves them (which takes a split second), and people are watching to see if everything is done correctly or incorrectly.

 

  1. The agreement you want to purchase (like TCS futures, IDEA futures etc.)
  2. The amount you want to purchase ( number of lots)
  3. The cost at which you wish to purchase (market or limit)

 

The RMS system checks the margin requirement after you make the order and approves the deal (provided you have the required margin amount).

However, the following details are those that you typically avoid giving the RMS system:

  1. The number of days you want to keep your transaction open—is it intraday or do you want to keep it open for a few days?
  2. The stoploss point is the price at which you would like to book a loss and close the position if the trade were to go against you.

 

What would happen if you gave the RMS system these extra details now? Obviously, your risk appetite would be better defined with the additional information streaming to the RMS system.

 

The algorithm may learn how much volatility you are exposed to, for instance, by providing information on the deal duration. You are only vulnerable to 1-day volatility if you trade intraday. However, if your deal lasts for several days, you have exposed to both the “overnight risk” and volatility over a number of days.

 

The risk of holding the investment overnight is known as overnight risk. For illustration, let’s say I overnight held a long position in BPCL futures, a significant oil marketing company in India. BPCL is quite susceptible to changes in the price of crude oil.

 

Assume that the crude oil market surges by 5% overnight while I own the BPCL futures. It is apparent that this will hurt BPCL the following day as it will become more expensive for BPCL to purchase crude oil from the global markets. As a result, if I hold a BPCL position overnight, I will lose money. thus, an M2M cut. This is known as an “overnight risk.” Regardless, the argument I’m trying to make is simple: from the standpoint of the RMS system, the longer you want to hold the trade, the more the risk you are exposed to.

 

Therefore, both the term and the stop loss of the trade provide the RMS system with more information about your risk tolerance. So, as a trader, what does this mean?

 

Consider this: The RMS method creates greater clarity the more information you supply about the risk you face. Less margin is needed the more clarity it has!

 

Consider this to be somewhat like purchasing a television from a consumer electronics store. Although the following analogy may not be particularly appropriate, I believe it conveys the intended meaning.

 

He will drop both his jaws and the pricing even further if you tell him you have the cash on hand and are ready to complete the sale right immediately. The key point is that the price becomes more appealing as and when the shopkeeper learns more details about the transaction.

 

Product types

One thing is certain at this point: the less margin is necessary, the more risk information you are willing to provide with the RMS system. It goes without saying that you can accomplish more with your capital the lower the required margins are. What is the best way for a trader to provide this data to the RMS system? Well, there are particular product categories designed for this use. You can select the product type when submitting an order (to buy or sell). There are many different Product kinds, and they are different from one another primarily in terms of their functionality and the data they provide to the RMS system. Although the basic operation of these product types is the same across all brokers.

 

NRML – NRML is a common product category. Use this if you want to buy a futures trade and hold it.

 

Keep in mind that when you utilize NRML, the risk management system has no further knowledge of your trade length (because you can hold the contract until it expires) or the stop loss. You experience losses (and therefore continue to pump in the required margins). As a result, the broker’s RMS system charges you the entire margins due to the lack of transparency (i.e. SPAN and Exposure).

 

When buying futures with the intention of holding the position for several days, use NRML. But keep in mind that you can also utilize the NRML product type for intraday trading.

 

Margin Intraday Square off (MIS) is a pure intraday product offered by Zerodha, which means that any trades entered into using this product type will be for a single day only. You cannot choose MIS as an order type and anticipate the position being kept for the following day. By 3:20 PM, you are required to cut the position; if you don’t, the RMS system will do the same.

 

The RMS system clearly recognises that it is an intraday deal now that the product type is MIS, making it a step beyond NRML in terms of information flow. Keep in mind that the trader is only exposed to one day’s volatility while trading intraday. As a result, the margin need is lower than NRML margins.

 

Cover order (CO): The idea behind cover order is straightforward. First, the cover order (CO), like MIS, is an intraday product. However, the CO provides extra stop-loss information. This means that you must also indicate the stop loss when placing a CO. As a result, CO transmits both of the essential details:

 

  1. The trade’s duration, which is one day
  2. The utmost loss you will tolerate in the event that the trade goes against you is known as the stop loss.

The buy CO form is depicted in the image below.

 

The stop loss must be specified in the section that is highlighted in black.

Obviously, I won’t get into the logistics part and describe how to place a CO from the trading terminal because we have covered that in a z-connect article.

 

I want you to be aware of the fact that when you place a CO, you are also communicating the maximum loss you are willing to accept in addition to the fact that your trade is intraday. Therefore, under this, the margins should decrease significantly (even lower than MIS).

 

Bracket Order (BO): This format is very flexible. Think of the BO as a cover order improvisation. A BO is obviously an intraday order, which means that by 3:20 PM on the same day, all BO orders must be settled. You will also need to include the following information when placing a BO:

  1. The stop loss is the point at which you want to exit a trade in the event that it goes against you.
  2. Trailing stop loss: You can optionally track your stop loss with this function. The topic of “The Trailing Stop Loss” has not yet been covered. At the conclusion of this chapter, we will talk about the same. But for the time being, keep in mind that a BO allows you the option to trail your stop-loss; in fact, this is one of a BO’s most well-liked characteristics.

  3. Target – The BO also asks you to pick the price at which you want to book the profits if the trade turns out well.

 

 

Your order is sent to the exchange by the BO, where you may also set a target price and a stop loss. For active traders, this is a tremendous comfort as it benefits them in numerous ways.

 

Of course, if you’re interested in the specifics of how to place a BO, you can read this post, which outlines what needs to be done in great detail.

 

The green box highlights the SL placements in the image below, which shows the BO buy order form.

 

If you consider a bracket order, the trader transmits to the RMS system the identical data that a CO transmits. Additionally, the trader is communicating the goal price through the BO. What impact does the target price information have on the RMS system, then? From the perspective of risk management, it practically makes no difference. Keep in mind that the RMS is only concerned with your risk, not your return. The margin charged for BO and CO is therefore the same as a result of this.

 

Now that the previous conversation has been put into context, let’s explore some of the other possibilities offered by Zerodha’s margin calculator.

Back to the Margin Calculator

A short recap: we presented Zerodha’s margin calculator in the last chapter. The margin calculator’s goal is simple to understand. It aids the trader in determining the amount of margin needed for the contract he wants to trade. We also gained an understanding of the terms expiry, rollover, and spread margins in our endeavour to comprehend the same. We can now understand how information flows into the RMS system and how it affects the relevant margins thanks to the guidance provided in this chapter. Keep these in context as we examine the other two choices in the margin calculator, “Equity Futures” and “BO&CO,” which are indicated in red. Here is a picture emphasising these aspects. –

 

Equity Futures – The margin calculator’s equity futures component is a ready reckoner because it enables traders to comprehend the following:


1. The margin in NRML needed for a specific contract

2. The minimum MIS margin necessary for a specific contract

3. How many lots a trader can purchase with a certain quantity of money in his trading account

 

Nearly 475 futures are included in the Equity Futures area (as of January 2015). Let’s complete a few tasks in order to better comprehend this. Using the margin calculator’s Equity Futures section, we will complete these tasks. In the process, ideally, you will gain a better understanding of how to use the section.

 

A trader has Rs. 80,000 in his trading account for Task 1. He want to purchase and hold for three trading sessions ACC Cements Limited Futures with an expiration date of February 26, 2015. the margin needed for this deal; find out what it is. What margin is necessary for him to trade Infosys January futures on an intraday basis? Does he own enough margin to open both trades?

 

Solution: Let’s start by taking care of the ACC futures. We must search for NRML margins because the trader expects to hold the futures contract for three working days. Be aware that the SPAN calculator can also be used to complete this operation. This was covered in the prior chapter. The Equity Futures calculator, however, offers a few more benefits than a SPAN calculator.

 

Visit the Equity Futures section, and you can see all the contacts listed here; scroll till you find the desired contract. I have highlighted the same in green. Do notice; that the calculator is also listing the contract’s expiry date, lot size, and the price at which the contract is trading.

 

The black vertical box highlights the NRML margin for each contract.

 

From the table, it is clear that the ACC Feb 2015 requires a margin of Rs.48,686/-.

 

To determine the margin requirement for Infosys, I need to scroll down till I spot Infosys January contracts or type “Infy” in the search box provided.

 

As we can see, Infy’s NRML margin is Rs.67,698/-(highlighted in the black arrow), and MIS margin is Rs.27,079/-(highlighted in the red arrow). Do note the MIS margin amount is drastically lower compared to the NRML margin,

 

Since the deal is intraday, it is obvious that the trader can select the MIS product type and take advantage of the lower margin requirement of Rs. 27,079/-. Please take note that the trader may choose the NRML product type even for intraday; doing so poses no risk. However, doing so results in a blockage of the NRML margin amount. It makes sense to choose MIS and utilize the available cash effectively if one is certain about intraday trading.


Anyhow, the total margin needed by the dealer would be –

 

  1. 48,686 in payment for the ACC contract (NRML margin as the trader wishes to hold the position for 3 days)
  2. toward the Infosys contract: $27,079 (MIS margins as it is a pure intraday product).
  3. Margin total of Rs. 75,765 (48,686 + 27079)

 

Obviously, the trader can start both deals because he has Rs. 80,000 in his account.

 

A trader has Rs. 120,000 in his trading account for Task 2. On both an intraday and multiple-day basis, how many Wipro January Futures may he purchase?

 

Solution: Use the given search bar to look up Wipro. There is a “Calculate” button next to the MIS margin column (highlighted in a green arrow). Press the same button.

 

When you click on it, a form-like window appears, and you must enter –

  1. The quantity of money in your trading account, which is by default set to Rs. 100,000 but can be changed to suit your needs.
  2. The contract’s current market price (in fact, this is pre-populated)

 

Given that NRML margin is Rs. 36,806 per lot, the calculator implies that I can trade up to 3 lots of Wipro futures under the NRML product type. I can trade up to 8 lots using the MIS product type because the margin required is only Rs. 14,722 per lot.

 

And with that, we are familiar with all the features of the margin calculator’s Equity Futures section. The BO&CO calculator is now our next stop.

 

BO&CO Margin Calculator

For the reasons we mentioned before, the margin requirements for bracket order and cover order are comparable. The BO&CO calculator is very similar to the SPAN calculator in that it is easy to use. I’m attempting to determine the margin need for Biocon Futures that expire in February 2015 in the following screen shot. You’ll see that I’ve chosen everything I needed to choose besides the stop loss.

 

I go and click the “compute” button without selecting the stop-loss. When I do this, the calculator determines the default stop loss one can use as well as the necessary margin. The calculator now computes the amount as indicated below once I mention the stop loss.

 

One may select Rs. 403 as the stop-loss using the BO&CO calculation. Naturally, the margins will alter depending on where you set the stop loss. However, the needed margin of Rs. 9,062 is significantly less than the NRML margin of Rs. 26,135 and the MIS margin of Rs. 11,545.

The trailing stoploss

Let’s briefly explore the “trailing stop-loss” before we wrap up this chapter. In bracket orders, the idea of a trailing stop loss is used, and it is fundamental to trading in general. So, I suppose it’s crucial to understand how to trace your stop-loss. Consider the following scenario, which most of us would have been in: You purchase a stock at Rs. 250 with the hope that it will eventually reach Rs. 270. You hope for the best and set your stop loss at Rs. 240 (just in case the deal goes against you).

 

Things go as planned; the stock advances all the way from Rs. 250 to Rs. 265 (just a few Rupees short of your target of Rs. 270), but because of market instability, it begins to retrace back, reaching your stop loss at Rs. 240. In other words, you briefly saw revenues coming in before being compelled to record a loss.

 

How do you handle such a circumstance? We are frequently placed in situations where we are correct about the general trend but are “stopped out” by market volatility.

 

Well, you can avoid being in this predicament by using the method known as “trailing your stop loss.” In fact, trailing stop loss occasionally provides you the possibility of earning more money than you anticipated.

 

Using a trailing stop loss is an easy idea. All that is required is a simple stop-loss adjustment based on stock movement. Let me give you an illustration of this. Here is an example of a trading setup:

 

It is obvious that the plan is to buy at Rs. 2175 and maintain a stop loss at Rs. 2150. As and when the price moves in the desired direction of the trade, the stop loss is to be adjusted. The SL can be changed precisely for every 15 points of price movement in the trading direction. Any level can be chosen for the SL with the intention of locking in the earnings. “Trailing Stop Loss” refers to the process of adjusting the SL with the goal of locking in earnings.

 

I was hoping you would take note of the fact that, although I chose at random a 15-point move for this example, it could actually be any price move. Please review the following table; as the pricing fluctuates fact, it might be any price movement, as it is in this example. Please take a look at the following table. I trail my stop loss to lock in a particular amount of profit whenever the price moves 15 points in favor of the trade.

 

Please take note that even while the trailing stop loss approach allows me to ride the momentum and close in on a greater profit, the original price goal was Rs. 2220.

 

 

CONCLUSION

  1. The RMS system will require less margin the more information one provides regarding trade duration and stop losses.
  2. When you wish to start a trade and carry it overnight, use the NRML product type.
  3. The highest margins (SPAN + Exposure) are for NRML.
  4. A pure intraday trade is MIS. The MIS margin is, therefore, smaller than the NRML margin.
  5. Only time information (intraday) and not stop-loss information is communicated in a MIS trade.
  6. An additional intraday product is a cover order (CO), where the stop loss must be specified.
  7. Both the time and the SL information are communicated by a CO. Margin is, therefore, lower than MIS.
  8. A CO’s margins are comparable to a Bracket Order’s (BO) margins.

  9. One can simultaneously set the SL and target price for a BO product type. Additionally, one can trace the stop loss.

  10. A trailing SL approach necessitates adjusting the SL as the script shifts in the trader’s favor.

  11. A trailing SL is a fantastic method to capitalize on a script’s momentum.

  12. There are no set trailing guidelines; the trailing SL can be chosen dependent on the state of the market.