Will I Be Able to Trade In F&O With Equity Sale Proceeds

Introduction

Many investors are confused about how to properly handle the money they make from selling shares of stock in light of SEBI's 20% block rule. It is possible that you will not know if the funds from an equity sale can be used intraday for a buyback, for futures and options trading, or for both.

Can I Use Equity Sale Proceed?

The key things you need to know in this regard are:

• You can put the money you get from selling shares of stock today towards other expenses anytime today.
• Still, you can't spend the money you get from the transaction all at once. On the day of the sale, 80% of the revenues from the equity sale will be available.
• Any unused funds will be made available beginning on day T+1.
  
• A new stock or Futures and Options (F&O) position can be opened on the same day using 80% of the proceeds.
• It is important to watch the margin you keep when using the proceeds for intraday and buy-back deals. In the event of a shortfall, a margin shortfall penalty may be imposed.

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What To Consider While Using Equity Sale Proceeds?

If you are using your equity proceeds to carry out any other stock or F&O transaction, you must keep the margin shortfall in mind. Let us understand it further with the help of the below example.

Assumption – You have one share of MRF and zero dollars in your trading account. The stake is worth Rs. 1 lakh, and you decide to sell it for that price. A 10% share haircut has been imposed.

Trades during the day – You buy one lot of Nifty Futures that was available at Rs 95,000.

Effect – Your Nifty Futures margin need will be recorded as Rs (1,000,000 - 10% of 1,00,000,000) = Rs 90,000. As a result, the Nifty Futures position has a margin call of Rs 5,000. The exchange is permitted to impose a shortfall penalty on the same.

Margin reporting is not necessary for equity cash segments. For this reason, you need not worry about incurring any margin shortfall penalties if you invest the full Rs 90,000.

What Is The F&O Trade And Reported Margin Relationship?

The preceding makes it quite obvious that on the same day that stock is sold, eighty percent of the proceeds can be used to trade F&O. The equity transaction, however, has a settlement cycle of T+1 days. Therefore, on the day of the sale, the unrealized portion of the equity sales proceed is considered collateral margin. 

Brokers in F&O transactions have a reporting obligation with respect to the daily margin amounts owed to and collected from traders. This is determined by considering both their closed and open situations.

Final Words

When you invest the money from the sale of shares of stock in futures and options trading, you are essentially investing the proceeds from unrealized sales. The reported margin takes into account the percentage haircut taken on the equity sale. If this requirement isn't met, a fine may be imposed. If you intend to invest the day's equities gains in F&O contracts, you should have this in mind.

Also Read : When the stock's price and futures contract are fluctuating, but the option contracts' prices aren't, what gives?