In Credit spread strategies, since there are situations, Short leg gets executed before Buy leg, hedge benefits are not available. How to plan capital allocation in such situations. I’m planning to deploy 5 credit spread strategies on 10L capital. For 1 Lot, margin requirements would be around 3 lacs only if all strategies are deployed at same time. But If Short legs are getting executed first, would need more than 10 lacs to deploy all strategies at same time. Pls guide.
Hi @nijinwilson
I would like to clarify one important point here.
During the entry of a Credit Spread strategy, the Algo always places the Long (Buy) leg first, followed by the Short (Sell) leg. This sequence is specifically followed so that the hedge benefit can be availed before the Short leg is executed.
The scenario where the Short leg gets executed while the Long leg is still pending can occur only if you have maintained additional margins beyond the allocated capital, allowing the broker to execute the naked Short position.
Therefore, you do not need to plan your capital assuming that all Short legs will execute first without the hedge benefit. The Algo’s execution flow is designed to first attempt the Long leg and then proceed with the Short leg.
I hope this clears up the confusion.