Why is the entire margin required to enter into a hedged position?
Hedged positions aim to reduce risk, but they still require
margin. There are two main reasons why you might need to put up the full margin
when entering a hedged position:
- Short Options
or Futures First: When you initiate a hedge by selling (shorting) options or
executing futures contracts before buying the underlying asset, you'll
need to put up the full margin required for those positions. It is because
you're creating a new position with potential for immediate loss.
- Buying Underlying Asset First: If you buy the underlying asset
(stock) first, followed by a short option or futures contract to hedge,
the margin requirement is typically lower. It is because the initial
purchase partially offsets the risk of the short position.
Note: The order in which you
place your hedge components can significantly impact the initial margin
requirement. For the lowest margin requirement, buy the underlying asset first,
then execute the short option or futures contract.
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