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Why Margin Benefit Disappears in Hedged F&O Trades- and How to Prevent It?

Post Date : August 18, 2025

Hedging is a powerful strategy in derivatives trading, allowing traders to manage risk and reduce the capital required through margin benefits. However, many traders are surprised when their margin benefit disappears, leading to a sudden increase in margin requirements or even a peak margin shortfall. Let’s break down why this happens and how you can avoid costly mistakes.

What is a Hedged Position and Margin Benefit?

A hedged position typically involves holding two or more offsetting contracts—like buying one option and selling another, or pairing futures and options—to reduce risk. Brokers and exchanges recognize the lower risk of such positions and grant a margin benefit, meaning you need to keep less capital as collateral.

Why Does the Margin Benefit Disappear?

The margin benefit is contingent on the hedge being intact. The moment you exit one leg of the hedge (for example, selling your long option but keeping the short), your position is no longer protected. This triggers a higher margin requirement for the remaining open position, as it is now considered “naked” or unhedged.

Common Mistake: Exiting the Wrong Leg First

If you exit the low-risk or low-margin leg of your hedge first, the remaining position becomes riskier. For example:

• Options Hedge:
  If you bought NIFTY 18300 CE and sold NIFTY 18200 CE, always exit the short (sold) leg first. Exiting the long leg leaves you with a naked short, which carries higher risk and margin requirements.
• Futures and Options Hedge:
  If you bought NIFTY 18500 CE and sold NIFTY futures, exit the futures position first. Exiting the option first exposes you to higher risk.
• Futures Spread:
  If you hold NIFTY futures of different expiries as a hedge, use a basket order to exit both simultaneously.

What Happens If You Don’t Exit Properly?

If you exit the wrong leg first:

• Margin benefit is lost immediately.
• Margin requirement can double during market hours, leading to a peak margin shortfall.
• Penalties or restrictions: As per many brokers’ policies (like RMoney), you may be blocked from receiving margin benefits, and your margin requirement for existing and new trades can increase by up to 2x during market hours. This does not affect your funds statement but can restrict your trading.

How to Avoid Margin Shortfall

• Always exit the position with the highest margin blocked first.
• Use basket orders to close both legs of a hedge simultaneously, especially in futures spreads.
• Monitor your margin requirements in real time, especially when managing complex hedges.

Key Takeaways

• Margin benefits for hedged trades are only available as long as the hedge is intact.
• Exiting the wrong leg first removes the hedge, causing a spike in margin requirements and potential penalties.
• Follow best practices: exit the high-margin leg first and use basket orders for simultaneous exits.

By understanding these rules and planning your exits carefully, you can maintain margin efficiency, avoid penalties, and trade derivatives with greater confidence and lower risk.

Need Help?

Contact RMoney at 0562-4266600 / 0562-7188900 or email us at askus@rmoneyindia.com