As the markets have turned volatile, margin requirements have gone up.

Futures trades are very good when the trade goes right. Mark to Market profits/Loss are settled everyday. One can fully cash the favorable moves.

It is very damaging when the trade goes wrong. Loss is immediately booked. To stay in the trade additional margin is required which may be difficult to arrange. If one goes out of the trade due to margin requirements, getting into the same trade again is generally not possible due to lack of conviction.

Let us look at the two margin requirements, one for NIFTY and the other one for SUNTV.

I would like to go short in both these Futures for the current month.

Margin for 1 NIFTY Lot is Rs. 74957.

Margin for 1 Lot of SUNTV is 92718.

For entering these two trades we need Rs. 167675.

How To Do Same Trade With Less Money ? :

I will buy Deep In The Money PUTS rather than going short in Futures.

Let us have a look at NIFTY PUTS 11500 and 11400 strikes.

Current NIFTY is 10930 and NIFTY OCT Futures at 10955.

PUT 11400 is priced near Rs. 440. Intrinsic Value of this option is 11400-10955 = 445. ( Calculated based on Futures Price )

As is available for Rs. 440-442, we are not paying any time premium.

Buying this PUT will cost Rs. 33000.

This PUT would behave exactly like a Futures Short Trade in NIFTY at current price. The trades will not be too dynamic in nature but if we are in for a significant gain of 200-300 points, we do not need frantic trading.

Coming to SUNTV:

Let us have a look at SUNTV PUTS for October Expiry.

Current Futures Price is Rs. 617.

PUT 640 has buyer and seller at Rs. 43 and Rs. 44 respectively. Let us say that trade happens at Rs. 43.

In this trade we have paid Rs. 20 extra  compared to the Intrinsic Value.

Buying this PUT will cost Rs. 43000.

This trade will not work exactly like the Futures Shorting of NIFTY because here we have paid extra premium.

Let us say the stock falls  to its recent 52 week low of Rs. 557.

Futures will give a profit of Rs. 60000. ( Lot Size 1000 ) Price Difference Rs. 60.

PUT 640 would be priced at Rs. 83. As we paid Rs. 43 to buy it the profit would be Rs. 40 or Rs. 40000 for the trade.

What is better– Getting 60000 profit on a margin of Rs. 92718 or 40000 on a risk capital of Rs. 43000?

I do not think it is a very difficult question.’

Options win hands down.

Difficulties :

Getting out of a deep in the money option is a bit difficult. You have to sell at a price lower by 2-3 Rupees. Still a worthwhile trade.

Advantages:

If there is a volatile move against the trade, say SUNTV goes up Rs. 30 in a day, MTM loss will be Rs. 30000 and there will be a call for additional margin.

With the PUT Option in place, there is no such worry of margin call. Mark to Market loss too may not be Rs. 30000 if there is time left for expiry. It may be around 18000-20000 depending on the time and Implied Volatility.

Initial cost for these two trades comes down from Rs. 167675 to only Rs. 76000.

Readers can work out their selected trades based on these examples.

Disclaimer: This post and examples are for teaching purpose only and are not meant as advice/suggestion to trade in these stocks. Trading in Futures and Options can lead to big losses and should be done with appropriate knowledge and advice only. Mentioning the stocks here does not imply that I have a trading position or likely to take a trade in these stocks.