# 📊 SmartBulls F&O Hedge Margin Logic & Calculation Guide This document defines the mathematical formulas, database configurations, real-time data calculations, and strategy execution rules for the **SmartBulls F&O Hedge Margin Engine**. --- ## 1. Executive Overview When a user holds offsetting positions in Futures & Options (e.g., Short Call + Long Call, Short Put + Long Put, or Future + Protective Option), their market risk is capped. The **Hedge Margin Engine** calculates: 1. **Standalone (Gross) Margin ($M_{\text{gross}}$)**: The total margin required if legs are placed independently. 2. **Net Blocked Hedged Margin ($M_{\text{hedged}}$)**: The actual reduced margin required after applying spread risk calculations and configuration rules. 3. **Hedge Benefit Credit ($\text{Hedge Benefit}$)**: The difference ($M_{\text{gross}} - M_{\text{hedged}}$) released back into the user's available cash balance. --- ## 2. Database Configuration Schema & Data The engine's benefit percentages, days-to-expiry (DTE) tiers, lot constraints, and safety floor percentages are fully dynamic and managed via MySQL database tables. ### 2.1 Table: `hedge_margin_benefit_config` Controls the benefit percentage released based on strategy type and **Days to Expiry (DTE)**. #### Schema Structure: | Column | Type | Description | |---|---|---| | `id` | INT | Primary Key | | `underlying` | VARCHAR(50) | Underlying asset filter (`ALL`, `NIFTY`, `BANKNIFTY`, etc.) | | `instrument_type` | VARCHAR(50) | Instrument filter (`OPTION`, `FUTURE`, `ALL`) | | `hedge_type` | VARCHAR(50) | Strategy Code (`CE_CE`, `PE_PE`, `FUT_PE`, `FUT_CE`, `SPREAD`, `CONDOR`) | | `from_days` | INT | Minimum Days to Expiry (inclusive) | | `to_days` | INT | Maximum Days to Expiry (inclusive) | | `benefit_percentage` | DECIMAL(5,2) | Discount percentage off standalone short margin | | `min_lots` | INT | Minimum lots required to qualify | | `max_lots` | INT | Maximum lots allowed | | `enabled` | ENUM('Yes','No') | Enabled flag | | `created_at` | TIMESTAMP | Record creation timestamp | | `updated_at` | TIMESTAMP | Record last update timestamp | #### Current Production Configuration Snapshot: | id | underlying | instrument_type | hedge_type | from_days | to_days | benefit_percentage | min_lots | max_lots | enabled | |---|---|---|---|---|---|---|---|---|---| | **1** | ALL | OPTION | `CE_CE` | 15 | 999 | **70.00%** | 1 | 10000 | Yes | | **2** | ALL | OPTION | `CE_CE` | 8 | 14 | **60.00%** | 1 | 10000 | Yes | | **3** | ALL | OPTION | `CE_CE` | 3 | 7 | **50.00%** | 1 | 10000 | Yes | | **4** | ALL | OPTION | `CE_CE` | 1 | 2 | **40.00%** | 1 | 10000 | Yes | | **5** | ALL | OPTION | `CE_CE` | 0 | 0 | **30.00%** | 1 | 10000 | Yes | | **6** | ALL | OPTION | `PE_PE` | 15 | 999 | **70.00%** | 1 | 10000 | Yes | | **7** | ALL | OPTION | `PE_PE` | 8 | 14 | **60.00%** | 1 | 10000 | Yes | | **8** | ALL | OPTION | `PE_PE` | 3 | 7 | **50.00%** | 1 | 10000 | Yes | | **9** | ALL | OPTION | `PE_PE` | 1 | 2 | **40.00%** | 1 | 10000 | Yes | | **10** | ALL | OPTION | `PE_PE` | 0 | 0 | **30.00%** | 1 | 10000 | Yes | | **11** | ALL | ALL | `FUT_PE` | 15 | 999 | **65.00%** | 1 | 10000 | Yes | | **12** | ALL | ALL | `FUT_PE` | 8 | 14 | **55.00%** | 1 | 10000 | Yes | | **13** | ALL | ALL | `FUT_PE` | 3 | 7 | **45.00%** | 1 | 10000 | Yes | | **14** | ALL | ALL | `FUT_PE` | 0 | 2 | **35.00%** | 1 | 10000 | Yes | | **15** | ALL | ALL | `FUT_CE` | 15 | 999 | **65.00%** | 1 | 10000 | Yes | | **16** | ALL | ALL | `FUT_CE` | 8 | 14 | **55.00%** | 1 | 10000 | Yes | | **17** | ALL | ALL | `FUT_CE` | 3 | 7 | **45.00%** | 1 | 10000 | Yes | | **18** | ALL | ALL | `FUT_CE` | 0 | 2 | **35.00%** | 1 | 10000 | Yes | ## 3. Realtime Data Inputs & Base Calculations To calculate margins in real-time, the engine uses live market ticks from Redis / Kite Ticker: 1. **Spot Cash Price ($\text{LTP}_{\text{spot}}$)**: Current market price of underlying instrument (or fallback entry price). 2. **Quantity ($Q$)**: Number of contracts ($\text{Lots} \times \text{Lot Size}$). Note: Short positions store $Q < 0$ in MySQL. 3. **Days to Expiry ($\text{DTE}$)**: $$\text{DTE} = \max\left(0, \lceil \frac{\text{Expiry Timestamp} - \text{Current Timestamp}}{86400} \rceil\right)$$ ### 3.1 Standalone Margin Formulas - **Option BUY Leg**: $$M_{\text{long}} = \text{Option Premium (Entry/LTP)} \times Q$$ - **Option SELL Call (`CE`) Leg**: $$\text{SPAN} = \text{Spot Cash Price} \times Q \times \left(\frac{\text{Margin \%}}{100}\right)$$ $$\text{Intrinsic} = (\text{Spot Cash Price} - \text{Strike}) \times Q$$ $$M_{\text{short\_CE}} = \text{SPAN} + \text{Intrinsic}$$ - **Option SELL Put (`PE`) Leg**: $$\text{SPAN} = \text{Spot Cash Price} \times Q \times \left(\frac{\text{Margin \%}}{100}\right)$$ $$\text{Intrinsic} = (\text{Strike} - \text{Spot Cash Price}) \times Q$$ $$M_{\text{short\_PE}} = \text{SPAN} + \text{Intrinsic}$$ - **Futures (`FUT`) Leg**: $$M_{\text{fut}} = \text{Spot Cash Price} \times Q \times \left(\frac{\text{Margin \%}}{100}\right)$$ --- ## 4. Strategy Formulas & Benefit Calculation For any hedged pair on the same underlying (`parentid`), $Q_{\text{hedged}} = \min(Q_{\text{leg1}}, Q_{\text{leg2}})$. ### 4.1 Strategy 1: `CE_CE` / `PE_PE` (Option Vertical Spreads) 1. **Debit Spreads** (e.g. Bull Call Spread, Bear Put Spread): $$\text{Max Loss} = (\text{Premium}_{\text{long}} - \text{Premium}_{\text{short}}) \times Q_{\text{hedged}}$$ 2. **Credit Spreads** (e.g. Bear Call Spread, Bull Put Spread): $$\text{Max Loss} = (\text{Strike Width} \times Q_{\text{hedged}}) - \text{Net Credit}$$ 3. **Safety Buffer**: $$\text{Safety Buffer} = \text{Spot Cash Price} \times Q_{\text{hedged}} \times 2.0\%$$ 4. **Required Hedged Margin**: $$M_{\text{hedged}} = \min(M_{\text{gross}}, \text{Safety Buffer} + \text{Max Loss})$$ 5. **Hedge Benefit Credit**: $$\text{Hedge Benefit} = M_{\text{gross}} - M_{\text{hedged}}$$ --- ### 4.2 Strategy 2: `FUT_CE` / `FUT_PE` (Futures + Option Hedges) 1. **Short FUT + Long CE (Covered Short)**: - Capped Max Loss: $\max(0, \text{Strike} - \text{Futures Price} + \text{Call Premium}) \times Q_{\text{hedged}}$ - $\text{Safety Buffer} = \text{Spot Cash Price} \times Q_{\text{hedged}} \times 2.0\%$ - $\text{Required Hedged Margin} = \text{Safety Buffer} + \text{Max Loss} + \text{Call Premium Paid}$ - $\text{Hedge Benefit} = M_{\text{gross}} - M_{\text{hedged}}$ 2. **Long FUT + Long PE (Protective Put)**: - Capped Max Loss: $\max(0, \text{Futures Price} - \text{Strike} + \text{Put Premium}) \times Q_{\text{hedged}}$ - $\text{Safety Buffer} = \text{Spot Cash Price} \times Q_{\text{hedged}} \times 2.0\%$ - $\text{Required Hedged Margin} = \text{Safety Buffer} + \text{Max Loss} + \text{Put Premium Paid}$ - $\text{Hedge Benefit} = M_{\text{gross}} - M_{\text{hedged}}$ --- ### 4.2 Strategy 2: `PE_PE` (Put Option Spread - Bull Put / Bear Put) 1. **Greedy Pairing**: Sort Short PEs by strike descending and Long PEs by strike ascending. 2. **Strike Width & Net Credit**: $$\text{Strike Width} = \max\left(0, \text{Strike}_{\text{short}} - \text{Strike}_{\text{long}}\right)$$ $$\text{Net Credit} = (\text{Premium}_{\text{sell}} - \text{Premium}_{\text{buy}}) \times Q_{\text{hedged}}$$ 3. **Maximum Spread Loss ($\text{MaxLoss}$)**: $$\text{MaxLoss} = \begin{cases} (\text{Strike Width} \times Q_{\text{hedged}}) - \text{Net Credit} & \text{if Net Credit} \ge 0 \\ (\text{Strike Width} \times Q_{\text{hedged}}) + |\text{Net Credit}| & \text{if Net Credit} < 0 \end{cases}$$ 4. **Safety Floor Margin**: $$\text{SafetyMargin} = \text{LTP}_{\text{spot}} \times Q_{\text{hedged}} \times 5.0\%$$ 5. **Config Benefit Discount**: Lookup $B\%$ for `PE_PE` using current $\text{DTE}$. $$\text{Raw Benefit} = M_{\text{short\_PE}} \times \left(\frac{B\%}{100}\right)$$ 6. **Final Hedged Margin Required**: $$M_{\text{hedged}} = \max\left(\text{MaxLoss}, \text{SafetyMargin}, M_{\text{gross}} - \text{Raw Benefit}\right)$$ 7. **Hedge Benefit Credit**: $$\text{Hedge Benefit} = M_{\text{gross}} - M_{\text{hedged}}$$ --- ### 4.3 Strategy 3 & 4: `FUT_PE` & `FUT_CE` (Futures + Option Hedges) 1. **Pairing**: Pair 1 Futures leg with 1 Protective Option leg (`FUT` + `PE` or `FUT` + `CE`). 2. **Config Benefit Discount**: Lookup $B\%$ for `FUT_PE` or `FUT_CE` in `hedge_margin_benefit_config` using current $\text{DTE}$. 3. **Hedge Benefit Credit**: $$\text{Hedge Benefit} = M_{\text{fut}} \times \left(\frac{B\%}{100}\right)$$ 4. **Final Hedged Margin Required**: $$M_{\text{hedged}} = M_{\text{gross}} - \text{Hedge Benefit}$$ --- ### 4.4 Strategy 5: `CONDOR` (Iron Condor Spread) 1. **Pairing**: Combines 1 `CE_CE` Call Spread and 1 `PE_PE` Put Spread on the same underlying. 2. **Formula**: $$\text{MaxLoss}_{\text{condor}} = \max\left(\text{MaxLoss}_{\text{CE}}, \text{MaxLoss}_{\text{PE}}\right)$$ $$M_{\text{hedged}} = \max\left(\text{MaxLoss}_{\text{condor}}, \text{SafetyMargin}\right)$$ --- ## 5. Real-Time Step-by-Step Worked Example ### Scenario: NIFTY Bear Call Spread (`CE_CE`) - **Underlying Spot Price ($\text{LTP}_{\text{spot}}$)**: `₹23,500.00` - **Current Date**: `2026-09-23` | **Expiry Date**: `2026-10-03` ($\text{DTE} = 10 \text{ days}$) - **Lot Size**: `75` | **Base Margin %**: `10%` #### User Positions: 1. `SELL NIFTY 23500 CE`, Qty: `75` (1 Lot), Sell Price: `₹150.00` 2. `BUY NIFTY 23700 CE`, Qty: `75` (1 Lot), Buy Price: `₹50.00` --- ### Step-by-Step Calculation: #### Step 1: Lookup DTE Tier in `hedge_margin_benefit_config` - For `hedge_type = 'CE_CE'` and `DTE = 10` (range `8` to `14` days $\rightarrow$ row `id = 2`): $$\mathbf{\text{benefit\_percentage} = 60.00\%}$$ #### Step 2: Calculate Standalone Margins ($M_{\text{gross}}$) - **Short 23500 CE Leg**: - SPAN Margin = $23,500 \times 75 \times 10\% = ₹1,76,250$ - Intrinsic Value = $\max(0, 23,500 - 23,500) \times 75 = ₹0$ - $M_{\text{short\_CE}} = \mathbf{₹1,76,250.00}$ - **Long 23700 CE Leg**: - Premium Paid = $50 \times 75 = \mathbf{₹3,750.00}$ - **Gross Margin ($M_{\text{gross}}$)**: $$M_{\text{gross}} = 1,76,250 + 3,750 = \mathbf{₹1,80,000.00}$$ #### Step 3: Calculate Spread Risk ($\text{MaxLoss}$) - **Strike Width**: $23,700 - 23,500 = 200 \text{ points}$ - **Max Width Risk**: $200 \times 75 = ₹15,000$ - **Net Credit Received**: $(150 - 50) \times 75 = ₹7,500$ - **Max Loss**: $$\text{MaxLoss} = 15,000 - 7,500 = \mathbf{₹7,500.00}$$ #### Step 4: Calculate Safety Buffer Margin (5.0%) $$\text{SafetyMargin} = 23,500 \times 75 \times 5.0\% = \mathbf{₹88,125.00}$$ #### Step 5: Compute Net Blocked Margin & Released Benefit - **Raw Config Discount**: $1,76,250 \times 60\% = ₹1,05,750$ - **Net Margin Floor Check**: $$M_{\text{gross}} - \text{Raw Discount} = 1,80,000 - 1,05,750 = ₹74,250$$ - **Net Blocked Margin ($M_{\text{hedged}}$)**: $$M_{\text{hedged}} = \max(7,500, 88,125, 74,250) = \mathbf{₹88,125.00}$$ - **Hedge Benefit Credit**: $$\text{Hedge Benefit} = M_{\text{gross}} - M_{\text{hedged}} = 1,80,000 - 88,125 = \mathbf{₹91,875.00}$$ --- ### Final Result Summary: - **Standalone Gross Margin**: `₹1,80,000.00` - **Net Blocked Margin in Account**: `₹88,125.00` - **Hedge Benefit Credited Back**: `₹91,875.00` - **Margin Saved**: **51.04%** relief on total capital required!