SPAN Margin
What Is SPAN Margin?
SPAN margin is calculated by standardized portfolio analysis of risk (SPAN), a leading system that has been adopted by numerous options and futures exchanges around the world. SPAN depends on a sophisticated set of algorithms that determine margin requirements as indicated by a global (total portfolio) assessment of the one-day risk for a trader's account.
Understanding SPAN Margin
Option margin alludes to the money that a trader must deposit into a trading account to trade options. This isn't equivalent to margining stock. The margin for stocks is actually a loan to you from your broker so you can buy more stock with less accessible capital. The margin for options on futures is a performance bond deposit that procures interest since it is generally held as short-term Treasury bills (T-bills).
Options and futures writers are required to have a sufficient amount of margin in their accounts to cover potential losses. The SPAN system, through its algorithms, sets the margin of each position in a portfolio of derivatives and physical instruments to its calculated worst conceivable one-day move.
It is calculated utilizing a risk exhibit that determines the gains or losses for each contract under different conditions. These conditions are alluded to as risk scenarios and measure profits (or losses) with respect to the price change, volatility change, and reduction in time to expiration.
The primary inputs to the models are strike prices, risk-free interest rates, changes in prices of the underlying securities, changes in volatility, and diminishes in time to expiration. The system, after calculating the margin of each position, can shift any excess margin on existing positions to new positions or existing positions that are short of margin.
The SPAN System
For options writers, SPAN margin requirements for futures options offer a more coherent and advantageous system than ones utilized by equity options exchanges. It is, nonetheless, important to point out that not all brokerage houses give their customers SPAN least margins.
On the off chance that you are serious about trading options on futures, you must search out a broker who will furnish you with SPAN essentials. The beauty of SPAN is that after calculating the worst-case daily move for one particular vacant position, it applies any excess margin value to other positions (new or existing) requiring margin.
Margin rules vary across the different options exchanges. For instance, the Chicago Board Options Exchange (CBOE) has a margin system different from that utilized by the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME). The latter two utilize the SPAN system.
Futures exchanges predetermine the amount of margin required for trading a futures contract, which depends on daily limit prices set by the exchanges. The predetermined amount of margin required permits the exchange to know what a "worst-case" one-day move might be for any open futures position (long or short).
Risk analysis is additionally finished for all over changes in volatility, and these risks are built into what is known as risk clusters. In view of these factors, a risk exhibit is created for every futures option strike price and futures contract.
A worst-case risk cluster for a short call, for instance, would be futures limit (extreme move up) and volatility up. Clearly, a short call will experience the ill effects of losses from an extreme (limit) climb of the underlying futures and a rise in volatility. SPAN margin requirements are determined by a calculation of potential losses. The uniqueness of SPAN is that, while establishing margin requirements, it takes into account the entire portfolio, not just the last trade.
Advantages of SPAN
The margin system utilized by the futures options exchanges gives a special advantage of permitting T-bills to be margined. Interest is earned on your performance bond (if in a T-bill) in light of the fact that the exchanges view T-bills as marginable instruments. These T-bills, nonetheless, do get a "haircut," which is 0.5% at the CME, but can be different relying upon the clearinghouse.
Due to their liquidity and almost zero risk, T-bills are seen as close cash equivalents. In light of this margining capacity of T-bills, interest earnings can sometimes be quite sizable, which can pay for all or if nothing else offset a portion of the transaction costs incurred during trading; a decent bonus for options writers.
SPAN itself offers one key advantage for options traders who consolidate calls and puts in writing strategies. Net options merchants can often receive good treatment. This is an illustration of the way you can procure an edge.
In the event that you write a one-lot S&P 500 call credit spread, which has the close leg at about 15% out of the money (OTM) with three months until expiry, you will get charged approximately $3,000-$4,000 in initial SPAN margin requirements. SPAN surveys total portfolio risk, so when and on the off chance that you add a put credit spread with an offsetting delta factor — that is, the call spread is net short 0.06 and the put spread is net long 0.06 — you generally are not charged more margin on the off chance that the overall risk isn't increased by SPAN risk clusters.
Special Considerations
Since SPAN is logically taking a gander at the next day's worst-case directional move, one side's losses are to a great extent offset by the other side's gains. It is never a perfect hedge, notwithstanding, on the grounds that rising volatility during an extreme limit move of the futures could hurt both sides, and a non-neutral gamma will change the delta factors.
Nevertheless, the SPAN system basically doesn't double charge you for the initial margin on this type of trade, which is known as a covered short strangle on the grounds that one side's risk is mostly canceled by the other side's gains. This basically doubles your margin power. An equity or index options trader doesn't get this ideal treatment while operating with a similar strategy.
Highlights
- The primary inputs to the models are strike prices, risk-free interest rates, changes in prices of the underlying securities, changes in volatility, and diminishes in time to expiration.
- SPAN margins are calculated utilizing risk clusters and demonstrated risk situations that are handled and dissected by sophisticated algorithms.
- SPAN Margin determines margin requirements in light of a global assessment of the one-day risk for a trader's account.
- Many, but not all, of today's major derivatives exchanges, utilize SPAN.
- Options and futures writers are required to have a sufficient amount of margin in their accounts to cover potential losses.
FAQ
Is Margin Interest Charged Daily?
While borrowing money to purchase stocks, otherwise called buying on margin, interest accumulates daily and is charged to an account monthly. The interest amount is automatically debited from an account's existing funds. In the event that the amount of funds in the account doesn't cover the cost, then a margin call will be issued.
How Does Span Margin Work?
SPAN is calculated utilizing different risk models that are standardized under the standardized portfolio analysis of risk (SPAN) system, employed by many exchanges. It calculates the margin requirement in light of a one-day risk of a trader's account. The system calculates the worst conceivable one-day loss of an account in light of different conceivable market situations. The largest loss of the calculated situations is the margin requirement.
What Is Span Margin in Options Trading?
In options trading, SPAN margin functions as collateral to cover against conceivable adverse price movements. SPAN is the base margin requirement expected to transact a futures or options trade in the market. The margin requirement is a standardized calculation of portfolio risk.
