Zerodha squares off your positions when you do not square off intraday positions, you do not maintain required margins, your collateral value from pledged stocks decreases due to increased haircuts, or the value of your pledged stocks falls. To learn more, see Why does Zerodha square off positions?
When you hold multiple positions and some need to be squared off due to margin shortfall, Zerodha decides which positions to close based on the following factors:
Multiple futures positions
If you hold multiple futures positions with different expiries and one needs to be squared off due to margin shortfall, Zerodha will generally close the contract closest to expiry (near-month contract) instead of next month or far-month contracts to the extent of the shortfall amount. This preference for near-month contracts exists mainly due to higher liquidity (more buyers and sellers), which helps reduce impact costs.
Far-month contracts have lower liquidity, leading to wider bid-ask spreads (the difference between the maximum price a buyer will pay and the minimum price a seller will accept). This wider bid-ask spread can increase your trading costs, potentially leading to larger losses if Zerodha chooses to square off these far-month expiry positions.
If you hold multiple futures positions of different instruments with the same expiry, Zerodha will prefer to close the position with the lowest bid-ask spread.
Example scenario
You hold November futures positions of ABBOTINDIA and AMBUJACEMENT, and one position needs to be squared off due to margin shortfall. The ABBOTINDIA NOV futures contract has a bid-ask spread of almost 80 points, whereas the AMBUJACEM NOV futures contract has only 0.20. Hence, Zerodha will consider squaring off the AMBUJACEM position.
The bid-ask spread of the ABBOTINDIA NOV Futures contract is almost 80 points, whereas the bid-ask spread of the AMBUJACEM NOV Futures contract is only 0.20. Hence, Zerodha will consider squaring off the AMBUJACEM position.
Since the position is squared off to the extent of the margin shortfall amount, Zerodha can decide to square off next month or far month contracts instead of the current month’s contract if the required margin for the next or far month expiry is closer to or equivalent to the margin shortfall amount. Zerodha squares off the position based on the extent of the margin shortfall amount.
Example scenario
You have a margin shortfall of ₹1 lakh and hold ADANIENT's current and next month's futures contracts.
- ADANIENT's November futures contract (current month) requires approximately ₹4 lakh margin
- ADANIENT's December futures contract (next month) requires around ₹1.0 lakh margin
Since positions are squared off based on the extent of margin shortfall, Zerodha may square off the December contract to cover the shortfall instead of closing the November contract.
If you hold a position for the current month in an instrument under a ban period, Zerodha prefers to close positions in instruments not under the ban, which could be for next or far-month expiry.
This approach avoids the higher margin requirements usually associated with ban period contracts. Additionally, closing a position under ban period would prevent you from re-initiating the position until the contract is no longer under ban. To learn more about ban period, see Why do F&O contracts enter the ban period?
Multiple positions with different margin requirements
If you hold multiple positions with different margin requirements, Zerodha prefers to close positions with higher margin requirements.
Example scenario
You have a margin shortfall of ₹6 lakh with these positions:
- 5 lots of ADANIENT with ₹4,50,000 margin per lot
- 5 lots of HINDPETRO with ₹3,00,000 margin per lot
- 10 lots of SBILIFE with ₹1,50,000 margin per lot
- 10 lots of HDFCBANK with ₹1,50,000 margin per lot
Zerodha will reduce 1 lot of ADANIENT and 1 lot of either SBILIFE or HDFCBANK to cover the margin shortfall, prioritising positions with highest required margins and then closing positions closest to the shortfall amount.
Stock and Index F&O positions
If you hold stock and index F&O positions, Zerodha will prefer squaring off index F&O positions to cover the shortfall. This is because index F&O contracts are more liquid compared to stock F&O contracts.
However, Zerodha may decide to square off stock positions instead of index positions if:
- Your index position is illiquid (such as deep ITM option contracts or far-month F&O contracts)
- You hold more stock positions than index positions
Example scenario
You have a shortfall of ₹2.7 lakh with open positions in BankNifty options and PFC futures.
- 3 lots of BankNifty, each requiring ₹90,000 margin
- 1 lot of PFC, requiring ₹2.7 lakh margin
To cover the shortfall, Zerodha will prioritise closing the BankNifty positions first (₹90,000 × 3 lots = ₹2.7 lakh) rather than the single lot of PFC with the same margin requirement, as index F&O positions are prioritised during square-off.
Hedged positions
Zerodha generally squares off positions for you when you hold hedged positions in a manner that maintains the hedge (positions aren't naked) or minimises your potential losses.
Example scenario
- You have a margin shortfall and hold long futures and long put option (PE) contracts. Given your hedged setup, Zerodha considers that squaring off only one type of position (either long futures or long PE option) could break the hedge, potentially exposing you to greater risk.
- Since futures positions settle on an MTM basis and options positions settle when squared off or expired, if the market moves against your futures positions, the MTM loss will be settled the same day, leading to margin shortfall.
- Therefore, Zerodha will square off equivalent amounts of both futures and options positions. This maintains the balance of your hedge, reducing your exposure to further market volatility.
- The exact quantities to be squared off from each position are determined based on the weightage of the options, considering factors such as liquidity of positions, margin requirements, and current market prices.
This way, Zerodha ensures your shortfall is covered without breaking the hedge.