Why is the account in debit after placing a stop-loss order?
The reason for the debit in the account after placing the SL (Stop Loss) could be due to a hedged position. Hedging is a strategy used to safeguard trading positions from potential losses in case of unfavourable market movements. A margin benefit is provided for hedged positions, which reduces the funds required for trading. To learn more about hedging, visit zerodha.com/varsity/chapter/hedging-futures.
Consider a scenario where two open positions are hedged against each other. Placing a Stop Loss order for one of the positions eliminates the hedge, treating both positions as separate open positions. Consequently, the margin requirement for these two positions increases immediately. If sufficient funds are not available in the account to cover the margin for an unhedged position, an SMS and email will be sent regarding the margin shortfall. Adding funds to the account can prevent automatic square off (closing/exiting) of the position.
Alternatively, monitoring the hedged position manually and exiting when necessary can be an alternative to placing a Stop Loss order. To retain the margin benefit on hedged positions, it is possible to use a GTT (Good Till Triggered) order instead of a Stop Loss order. To learn more about GTT, see How to use the Good Till Triggered (GTT) feature?
- In the case of a long Nifty position hedged with a short call position, ₹1,62,000 will be blocked in the trading account, considering the hedging margin benefit.
- Placing a Stop Loss order for Nifty May 15000 CE removes the hedge and results in the loss of the margin benefit. As a result, the complete margin of ₹2,94,315 will be blocked in the trading account.
- Insufficient funds in the account will trigger SMS and email notifications for a margin call.
- Opting to place a GTT order instead of a Stop Loss order will maintain the blocked funds at ₹1,62,000, ensuring the retention of the margin benefit.