How to Use Margin Pledge in Options Trading: 4 Benefits and Risks
Margin pledge is one of the most unique techniques you can employ for options trading. Margin Pledging is utilizing the available securities as collateral to get borrowed funds that can be used to trade options.
By pledging your securities as collateral, you can retain the ownership of your securities instead of liquidating them to enter the options market.
In simple words, you can access additional funds for options trading using the existing securities as collateral using a margin pledge.
This article discusses the benefits and risks associated with using margin pledge in NSE option trading.
Benefits of Margin Pledge in Options Trading
Here are four advantages you can avail of by using margin pledging.
1. Leverage Trading Opportunities
The potential to increase your trading capacity is one of the significant advantages of a margin pledge in options trading.
Leveraging your existing securities can increase your trading capital and let you participate in bigger trades in online trading in the stock market. Options trading using a margin pledge can yield higher returns.
2. Availing Funds without Selling Existing Positions
Selling securities to raise money in conventional funding situations may lead to potential capital gains taxes. At the same time, it might interfere with your existing financial goals.
For example, if you sell your long-term stock investment to enter an option position, you risk disrupting your long-term goals. Also, if your trade goes in the opposite direction, you can lose your money.
This is not the case with using the Margin pledge. You can access funds on your existing securities by pledging them as collateral. When you close your option trade, your collateralized securities are released back into your account.
The margin pledge option provides you with the freedom to diversify your funds among several types of underlying assets for options trading as you have a large sum to place trades by getting leverage on your pledge securities.
4. Preservation of Asses Ownership
Margin Pledge allows you to retain the ownership of your securities instead of selling them to raise funds. Your securities are frozen for the time of the trade, which you can unfreeze when you close the position.
The funds gained from the margin pledge can be utilized to take large positions and earn profit.
Risks of Margin Pledge in Options Trading
Here are the risks of using margin pledge for trading in options.
While leverage is great for increasing profits, at the same time, it can also intensify losses in options trading.
Borrowed funds expose you to more risks because losses might exceed the funds you have put in for trading. Thus, you need to be careful and have risk management in place.
Borrowing funds through a margin pledge comes with interest being charged on the borrowed amount. The repayments of the interest will reduce your potential profits.
Thus, ensure that the trading platform you are choosing has competitive interest charges.
3. Adverse Effect of Market Volatility
Due to the unpredictable nature of the market, you might experience significant price fluctuations in the underlying asset, which has a direct impact on your option trading positions.
This market volatility may exaggerate the risks associated with margin pledge-based options trading. Thus, ensure you have stop loss and take profit level in place to avoid downside risk.
4. Margin Calls and Forced Liquidation
Your broker may issue a margin call if the value of your collateral decreases, This requires you to deposit additional funds to meet the initial margin level, or else the broker may liquidate your collateralized securities.
Market pledges allow you to leverage additional funds. However, it’s imperative to thoroughly understand significant risks and rewards before embarking on options trading with a margin pledge.
If you wish to undertake option trading with margin pledge, you can choose an options trading app that is holistic. Doing so can simplify your journey of online trading in stock market with its diverse range of features and tools.
