How to make the best of your intraday trading margins

Guide to Technical Research | Published on 31st July 2018 | 8624

Today, non-delivery based trading on the stock exchanges ranges from 70-75% on a daily basis. This is largely driven by intraday traders who look to play more on the short term price volatility of the stock. For a trader to be successful in intraday trading there are 4 basic pre-conditions. Firstly, the trader needs to zero in on the right stocks to buy and sell at the right time. Secondly, the intraday trader needs discipline. This includes discipline in putting stop losses, discipline in regular booking profits etc. Thirdly, the intraday trader needs to keep a constant tab on capital. Since the intraday trading is a leveraged business, risk has to be managed at multiple levels. It has to be managed at the level of the trade, at the daily level and at an overall capital level. Last, but not the least, intraday trader is also about getting the best in terms of leverage so that margin payable is low and the churn can ensure higher ROI for the trader. That is the crux of intraday trading.

One of the key merits of intraday trading is that it permits you to short sell the stock without delivery and cover it by evening by paying a small margin. Remember, short selling is not permitted to be carried forward in rolling settlements since all positions not closed out the same day will result in compulsory delivery. The key therefore lies in making the best of your margins. Here is how you can go about it.

Know what margins are mandatory from an exchange point of view…

In delivery buying, the broker will not only insist on margins but also that you pay the full amount by end of the day or latest by T+1 date. However, if you do not intend to take delivery, you can actually trade intraday by just putting up a margin. There are 2 types of margins; SPAN margins and Extreme loss margins (ELM). While the former has to be mandatorily collected from the client, the latter is optional and at broker’s discretion.

SPAN margin is also called volatility margin and is based on the concept of Value-at-risk (VAR). It calculates the probability of loss on more than 99% of the trading days. Depending on the volatility of the stock, the SPAN will vary. SPAN margin is mandatory. Exposure margins or Extreme Loss Margins (ELM) is imposed as an extreme protection measure. It is not compulsory to collect these margins but most brokers collect these margins as a measure of abundant caution. The sum total of SPAN margin and ELM margins becomes your Initial Margin for the purpose of intraday trading. You can bargain with your broker for paying only SPAN margins if you are trading strictly intraday only and with stop loss.

Always select the MIS option specifically for better leverage

You trading screen has an in-built MIS option. The Margin Intraday Square-off (MIS) option is automatically classified as an intraday order and margined accordingly. Once you have selected the MIS option, your broker will be happy to extend the facility of waiver of collection of ELM and you are only required to pay the SPAN. There are 2 things to remember here. Firstly, select that you want to place an MIS order so that you are automatically eligible for higher leverage. Secondly, this is a trade-off between stock movement and SPAN margin. If you select a stock with more volatility, you stand a better chance of making trading profits but the SPAN margin will also be higher. For example, stocks like Reliance, Infosys etc will give you 10X leverage.

All MIS orders have to be necessarily closed intraday. Your broker runs a MIS check after 3.10 pm and any open intraday positions are automatically squared off. But, don’t just rely on the broker to take care of your positions because the onus of closure is on you and not on the broker.

Using Cover Orders and Bracket Orders intelligently…

If you place an intraday order (MIS) with a compulsory stop loss order tagged to it, then it becomes a Cover Order (CO). A simultaneous stop loss order and a profit booking order, is called a Bracket Order (BO). CO and BO orders are essentially risk management mechanisms since your downsides and upsides are defined. Normally, when one side of the order gets executed, the other leg automatically gets cancelled. That means, if stop loss is triggered then profit order is cancelled and if profit is booked than stop loss order is cancelled. The leverage that the broker will offer you in the case of CO and BO orders is nearly twice of a normal MIS order. In the process, you not only manage your trading risk better but also get more trading leverage on your margin. That is almost like hitting two birds with one stone.