If you sell options or trade futures it is highly recommended that you ask for a collateral margin against the stock holdings in your Demat account from your broker and trade futures and options with that money without bringing extra money into your trading account.
However, collateral margin money comes with terms and conditions. Kindly read about them on your broker’s website before taking the collateral margin.
For example, ZERODHA’s terms for collateral margin are:
- A fee of ₹30 + GST per instrument, irrespective of the quantity pledged. Whether you pledge 10 shares of a company or 100s shares, the fee will be ₹30 + GST.
- The collateral margin will be available on T+1 day for the stocks that are pledged before 5 PM.
- When using collateral margin to trade F&O, the shareholder must have 50% of the margin requirement in cash or cash equivalents. If not, interest at 0.035% per day will be charged on the cash component funded by Zerodha.
This means if the margin blocked is 100,000 to trade a stock/index future, the collateral margin that can be used for funding this margin without any interest is 50,000. Anything above this will be charged 0.035% per day until the trade is closed.
- Use of collateral margins from pledging the holdings will only be allowed with a positive cash balance. If your account has a negative cash balance then collateral margin will not be given.
- Zerodha can sell the stocks that are pledged if the trade is closed in a loss which is more than the free cash used to fund the trade. In the above example up to 50k was used by the client – but 50k was funded by Zerodha as collateral margin. If the loss is 60,000 then Zerodha can sell the stocks that were pledged to recover 10.000. So be very careful if you pledge your stocks for collateral.
- Pledged stocks will be considered for physical delivery obligations if stock F&O contracts expire In The Money (ITM).
My advice: If you are a disciplined trader and always trade with a hedge then there is nothing wrong with getting collateral. In any case, a hedge reduces the total margin blocked – so it is highly unlikely that you will ever pay any interest for the margin you are using.
Plus the hedging will ensure the loss if any is also less – this will make sure your stocks are not sold by Zerodha or your broker.
Kindly read your broker’s terms and conditions for pledging shares before pledging your shares to get the collateral margin.
You can do my Conservative Option Course to learn the best way to hedge options and futures and start making a monthly income.
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