Why is the entire margin required to enter into a hedged position?

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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