Margin Calculator Part2

Trade Deal Information

We begin this chapter with an old question – why do you think margins are imposed? Now let us repeat the answer one more time:

Margin is applied for risk management. Through margin it is tried that the counterparty does not default. The RMS system i.e. Risk Management System is installed in the broker’s office, which is responsible for overseeing the risk management. RMS is a computer program and all the orders of every trader go to the RMS first and only then go to the exchange. Some people keep a constant eye on the RMS to know whether everything is going well or something is going wrong.

When you enter a trade you give some information to the RMS like let’s say you enter a trade to buy a futures contract then you are telling RMS that

• You want to buy an RMS like TCS futures, Idea futures etc.
• How much of this futures contract do you want to buy (how many lots)
• At what price do you want to buy this futures contract – market price or limit price.
• Once you enter this trade, the RMS system decides how much margin is required in that trade and forwards the trade to the exchange if you have that much money in your account.
• But there are some information that you do not give to the RMS system, such as –
• How long are you going to keep this deal – is it an intraday deal or will you keep it for several days?
  Your Stop Loss Price – If the trade moves in the opposite direction of your opinion, at what price would you book a loss and square off your position?
• What if you give this information to the RMS system as well? The RMS system will work better as it will be more aware of the risks.

For example, if the system knows the time period of a trade or trade, the system will know how much volatility you can face. For example, if your trade is intraday, then you will face only 1 day of volatility. But if you are going to keep the deal for several days then you may face volatility for several days. Also, you will have to face overnight risk.

Overnight risk is the risk you take when you keep your deal with you till the next day. For example, suppose I keep a long deal of BPCL with me overnight, you know that any fluctuation in crude oil has an effect on BPCL. Now suppose the same night crude oil goes up by 5%, due to this the next morning the stock of BPCL will have a bad effect because it will become expensive for BPCL to buy crude. Now because I have kept this deal with me overnight, I may have to suffer loss in this deal of BPCL. That is, I will have to face a cut in M2M. This is called overnight risk. So now you understand that if we hold the deal for a long time and RMS knows this then it will know that your risk is increasing. From an RMS perspective, the longer you hold the deal, the higher your risk.

Similarly, think about the stoploss of your trade. When the RMS does not know what your stoploss is and how much you are willing to take, the RMS does not understand your risk appetite. Although it is not necessary to specify stoploss in any trade but if RMS knows this then the system will be able to work more efficiently. For example suppose I have bought futures of BPCL at ₹649 but my stoploss is not fixed. So there is no limit to my risk. But suppose I said that my stoploss is ₹640, then I am taking a risk of ₹9 only. I will square off my position as soon as BPCL reaches ₹640 and take the loss. This information can be very important for RMS.

So both the stop loss and the time period are very important information in any trade, which lets the RMS know how much risk you can take. But what is its significance for the trader?

The more information you give to RMS, the less margin you will need to pay.

Let us understand this with another example. Suppose I go to an electronics shop and ask for the price of the television, what will the shopkeeper do? One will tell the price like any other would tell the customer. But if I tell him that I have to buy 50 televisions, the shopkeeper will tell a new price which will be less than the previous price. If I also tell him later that I have brought cash and want to buy it now, he may drop the price further. This means that as you provide more information, it becomes easier to bargain and you can get a better price.

Product Type

So now we understand that the more information the RMS has, the lesser the margin will be. If you have to pay less margin, you will be able to make better use of your capital. So now the next question is, is there any way you can pass more information to the RMS system? The answer is yes. There are many special products to trade in the market which are made for this. You can choose one of these products when you place your order to buy or sell stocks/futures in the market. Each product is different from each other as it provides different information to the RMS. Although all the products mainly perform the same function but each broker calls them by different names. Here I will give you information about these products of Zerodha. If you are trading through another broker, you should consult your broker about such products.

NRML – This is the most straightforward product. You can use this product when you want to hold your deal.

Remember that in NRML trades, the risk management system does not get any additional information about how long you want to stay in the trade, nor does it get any information about where you have placed your stop loss. If there is a loss, you put more margin money. Since the RMS gets less information in this, the RMS system charges you the full margin in the NRML transaction (Span + Exposure)

You can use NRML trading when you want to hold your futures position for a number of days. Remember that NRML deals can be used for intraday also.

Margin Intraday Square Off (MIS) – MIS is a fully built product for intraday trading. If you have selected MIS as a product then it means that your deal is only for 1 day. You cannot select MIS if you wish to move your position to the next day. You must close your deal before 3:20 PM on the same day. If you do not do this, the RMS system will automatically do this work.

Because in this type of transaction the RMS knows that it is an intraday deal, it also knows that there is only one day for volatility in this transaction. That is why margins are less in such deals (MIS) as compared to NRML deals.

Cover Order (CO) – Like MIS, cover order is also an intraday product. The only difference is that in the cover order, you have to specify the stop loss as well. In this way, the CO order gives two details of your transaction

Provides time period information (intraday deal)
Also gives information about stop loss. That is, tells how much loss you are ready to take.

View a screenshot of a CO

In this screenshot, in the black highlighted part, you have to tell how much stop loss is. See this article on how to place CO orders in the trading terminal. (article in z-connect. )

You have to remember that when you place an order in CO, it means that you are stating that it is an intraday deal and also you are indicating the maximum loss you are willing to bear. That’s why RMS charges you less margin in this case. This margin is also less than the margin of the MIS order.

Bracket Order (BO) – Bracket order is actually a modified form of cover order. This is also an intraday product, meaning here also you have to square off your deal before 3:20 pm. Before entering the BO deal, you have to give some more information-

Stop Loss – If the trade is not going according to your liking, then at what price do you want to exit the trade?

Trailing Stop Loss – There is another feature i.e. facility through which you can trail your stoploss. If you are not aware of Trailing Stop Loss then we will discuss about it at the end of this chapter. But just remember that this order gives you a chance to trail the stoploss and that is the most popular part of this product.
Target – If the deal is going according to your wish, then BO also asks you to tell at what price you would like to book your profit or profit.

When you place a trade in a BO order, you can also inform the exchange what your target is and what is the stoploss. This is a great convenience for any active trader. You can have a look at this article for how to enter the BO deal. ( article)

The picture below shows the order form of BO with stoploss placed in the green highlighted area.

If you look carefully, you will understand that in the bracket order, the trader gives all the information to the RMS that is given in the CO but apart from this the trader is also telling what his target is? By the way, knowing the target does not benefit RMS much because RMS wants to know about your risk, not about the profit you will get. That is why the margin in BO and CO is the same.

Now once again let us look at some more features present on Zerodha Margin Calculator.

Revisit the margin calculator

We had a look at the margin calculator in the previous chapter. The biggest advantage of a margin calculator is that any trader can find out how much margin he has to pay for his trade. On this pretext, we have also understood about other principles like expiry roll overspread margin. Now we also know how information is passed to the RMS system and how it affects margins. Keeping all this in mind let us now discuss two more options given in the margin calculator – “Equity Futures” and “BO &CO”. These are highlighted in red in the screenshot below.

Equity Futures – The Margin Calculator in the Equity Futures section acts like a ready reckoner. It gives an opportunity to any trader to understand the following things:

• What is the margin required for an NRML transaction?
• What is the margin required for MIS transaction?
• How many lots can you buy with the amount of money in the trading account?

As of January 2015, there were 475 contracts in the equity futures segment. Let’s do some exercises to understand the equity futures part better. We will try to accomplish these exercises with the help of Margin Calculator for Equity Futures. Hopefully after this you will be able to understand the use of this part better.

Exercise 1 – A trader has ₹80000 in his trading account. He wants to buy a futures contract of ACC Cement Limited with expiry on 26 February 2015 and wants to hold this contract for 3 trading sessions. Find out how much margin is required for this deal? Apart from this, the trader also wants to buy January futures of Infosys. But he wants to buy it for intraday. How much margin will be required for this? Does he have enough money in his account to do both the deals together?

Answer – Let us first look at the case of futures of ACC, as the trader wants to hold this contract for 3 days then we have to look at the NRML margin. Of course, we can do this with the span calculator as well and we saw that in the previous chapter. But equity futures calculator has some extra features which is not in span calculator that’s why we will look at it through equity futures.

When you go to the equity futures section, you will see a lot of contracts there. You have to find the contract for your work. I have highlighted ACC with green color here. You can see that the expiry, lot size and price of these contracts are also mentioned in this calculator.

I have also shown its NRML margin in the black box.

It is clear from the above screenshot that for ACC’s February 2015 contract, you will need a margin of ₹ 48686.

To find the margin for Infosys, I need to find the January contract of Infosys in the list. By the way, I can also search for it by typing infy in my search box.

As we can see one’s NRML margin is ₹67698 (shown with black arrow). MIS margin is ₹27079 (shown with red colored arrow). So it is clear that MIS margin is much less than NRML margin.

This deal is intraday so any trader can opt for MIS and do this deal with low margin. Although this deal can also be done with NRML margin, but doing so will lock in more of your money as margin. So if your mind is clear that this is an intraday deal then it is better to do the deal through MIS only.

So now we know the total margin the trader will need is:

₹ 48686 for ACC contract Since this deal is going to be held by the trader for 3 days, NRML will be used here.
₹27079 for Infosys contract. Here MIS margin will be used as it is an intraday trade.
The total margin will be ₹75765 (48686+27079).

Now since the trader has ₹80000 in his account, he can do both these deals.

Exercise 2: A trader has ₹120000 in his account. How many lots of Wipro January futures contract can he buy for intraday? How many lots can he buy if the same deal is to be done for several days?

Answer – Search Wipro in the search box. The option to calculate is given next to the column with MIS margin (shown with green arrow). Click it.

When you click on Calculate, a new window will open. Here you have to fill this-

How much amount is in your trading account (by default the amount appears as one lakh but you can change it according to your need)
At what price is this contract being sold? Well it comes on its own.

Now, look at this screenshot-

The calculator is showing that I can also buy three lots of this contract under NRML product on Wipro futures. Its margin in NRML will be ₹36806 per lot. According to MIS product also I can buy 8 lots there margin is only ₹14722 per lot.

Now it should be clear to you how the Margin Calculator works in the Equity Futures section. Now we’ll look at the BO&CO calculator.

BO&CO Margin Calculator

We already know that both bracket orders and cover orders have the same margin requirement. The BO&CO calculator is very easy to use and is almost like a span calculator. In the below snapshot you can see that I am trying to buy Biocon futures which expire in February 2015. You will see that I have given every information except the stop loss.

When I press the calculate button without specifying the stop loss, this calculator automatically gives a stoploss by default which you can choose if you want and also the margin specified. But when I enter my stop loss the calculator calculates the margin again accordingly.

According to the BO&CO calculator, the stop loss can be chosen at ₹403. But when you change your stop loss the margin will also change accordingly. As of now, this margin is ₹9062 which is much less as compared to ₹26135 for NRML and ₹11545 for MIS.

Trailing Stop Loss

Before we conclude this chapter, let us take a look at the Trailing Stop Loss. Trailing stop loss is used in bracket orders and it plays a very important role in the market anyway. That is why it is important that you know about how to trail stop loss. Imagine you bought a stock for ₹250 and you expect it to go up to ₹270. You have placed your stoploss at ₹240 for this trade. Your intention is that if the stock goes down, you will exit the trade at a loss of ₹240.

But the deal goes according to your mind and the share rises to ₹ 265. Now this stock is just a few rupees away from your target ₹270. But due to volatility of the market, it starts coming down and by coming down it reaches your stoploss ₹240. So you must have shown profit for a while but it turned out to be a loss deal for you. What should you have done in such a situation? It happens many times when your opinion about the direction of the market turns out to be correct. But due to market volatility you lose.

Trailing stoploss is used only to avoid such situation. In fact, trailing stoploss can sometimes give you more profit than you expected.

This is a very simple principle. Here all you have to do is change your stoploss according to the movement of the stock. I explain this with an example.

Trade	Long
Share	Infosys
Instrument	Futures
Cost	Rs.2175/-
Target	Rs.2220/-
Stoploss	Rs.2150/-
Risk	Rs.25 (2175 – 2150)
Reward	Rs.45 (2220 – 2175

Here the intention is to create a long position at ₹2175 and place a stop loss at ₹2150. Now all we have to do is change our stoploss as the price moves in the direction of our trade. For example, for every 15 point change, we need to change our stoploss as well. Stoploss can be placed anywhere. You can place stoploss wherever you want to tie your profits. When you change your stoploss according to the profit margin, it is called trailing stoploss. Keep in mind that the rule to change the stoploss every 15 point change is just illustrative. In fact you can put it in any way you want. But now to understand this let’s look at the table below where I have shown the stoploss trailing every 15 points so that some profit can be tied.

One thing to note here is that our initial target was 2220 but because of the trailing stoploss, I was able to take advantage of the momentum and make more profit.

Highlights of this chapter

• The more information you give to the RMS system about the duration of your trade, about the stop loss, the lower the margin for you.
• When you want to place a trade that you want to hold overnight, you have to choose the NRML product.
• NRML has the highest margin (Span + Exposure).
• MIS is fully intraday trade so it has less margin than NRML.
• In MIS only the time period information is given that the deal is intraday, but no information is given about the stop loss.
• Cover order (CO) is also an intraday deal but in this you have to specify your stoploss as well.
• In a cover order, since both the time period and stoploss are reported, there is less margin than MIS.
• Bracket orders (BO) have the same margin as cover orders (CO).
• Bracket orders allow you to inform your stoploss and target in one go. Apart from this, you can also trail your stoploss.
• In the trailing stoploss technique, you have to move your stop loss along with the change in the direction of trade in the price of the stock.
• With Trailing Stoploss, you can take advantage of the momentum of a stock.
• There are no fixed rules and regulations for trailing. You can trail your stoploss according to your need and market conditions.