Margin requirement for option writing

After the changes in the margin requirement for option writing in june 2020, hedged positions are required to have limited margin which is a welcome move as it gets closer to the ground reality that loss from the option writing and margin are not way too different, it has come closer. for e.g Bear call spread with 100 point risk width i.e. 10000 PE sell and 9900 PE buy of 1 lot requires 22K margin while the loss is 7.5 K post june adjustment- however prior to june margin was much higher not reflecting the ground reality of loss possible. I did the analysis of Iron condor margin and short strangle margin requirement to aid my choice of strategy for optimal ROI - following are my analysis

Iron Condor

Date: 2-8-2020 Nifty Spot - 11073.45

1. IC gives more ROI than deploying one side spread - for e.g bear call or bull put with 100 risk width is 22k margin  while deploying both side spreads (iron condor) will reduce the total margin to 38K instead of 44K thereby increasing ROI - Hence it is always prudent to deploy IC instead of one side spread. if we not resistance on one side - choose very conservative spread with low delta (anyways premium will be high on that side since the POP is less
2.  Deploying spread with higher width for hedging gives more ROI. For e.g deploying IC with 100 point risk width on both sides will require 34K margin while that of 500 point risk width will require higher margin of 60K - however the return will be mugh highers compared to 100 point risk width- hence resulting in higher ROI- typically resulting in increase in ROI to double . However the max loss for higher risk width is much higher.But this can be mitigated by taking broad spread like 1000 points from strike on each side totalling spread to 2000 points and also following adjustments. higher profit possible by moving the tested side closer to strike. for every 100 point increase the IC margin requirement is roughly 6000 more. Find below chart generated out of live data showing risk reward for various risk width 

3. Choose the same risk width on both sides - Margin is calculated based on the risk on the side which has higher risk width - hence, to get optimal ROI for margin - choose the same risk width on both sides

4. Deploy this on monthly or current week +2 expiry series as the time decay in absolute terms is more for week +2 to week +1 and week +1 to current rather than current week time decay 

5. The market movement range in current week (or) week + 1 to current week (or) week +2 to current week is almost same +6. find below the nifty movement analysis of last 5 years of week -1 expiry day open to current week expiry close and week -2 expiry day open to current week expiry close. 1 week nifty movement has been +- 5% for 98% times and 2 week nifty movement has been in +- 5% for 95% times. Taking out black swan event like covid - Max reduction in 1 week has been from -6.16 % and -7.5% for 2 weeks and Max gain in nifty in 1 weeks has been 6.69% and in 2 weeks has been 6.85%. Hence over all taking positions overall in week 2 and exiting in current week if profit realization has been more than 60% is good strategy rather than waiting till expiry. If in M2M loss and you are failr confident that positions will get back to profit then continue in current week also.      

  

6. Monthly options have also been range bound within +- 7% for 95% times- advantage with monthly options is that we will have time to do adjustments and also it is highly liquid

 

Short Strangle

Margin for deploying short on one side at ATM is 140 K but the overall margin reduces if we deploy short on both side - for short straddle (shorting call and put ATM) margin is 155K. the margin requirement reduces by 5K as we keep moving 100 points further away from strike price on both sides and the strategy get converted to short strangle. for August expiry series IC with 100 risk width deployed between 10200 PE to 10800 CE requires 38K margin while short strangle require 115k margin

      

There are pros and cons on both side - take a range and choose the strategy which gives high return.