SPAN margin is considered by many to be the superior margin system available. For option writers, SPAN margin requirements for futures options offer a more logical and advantageous system than ones used by equity option exchanges. It is, however, important to point out that not all brokerage houses give their customers SPAN minimum margins. If you are serious about trading options on futures, you must seek out a broker who will provide you with SPAN minimums. The beauty of SPAN is that after calculating the worst-case daily move for one particular open position, it applies any excess margin value to other positions new or existing requiring margin.
Futures exchanges predetermine the amount of margin required for trading a futures contract, which is based on daily limit prices set by the exchanges. The predetermined amount of margin required allows the exchange to know what a "worst-case" one-day move might be for any open futures position long or short.
Risk analysis is also done for up and down changes in volatility, and these risks are built into what are known as risk arrays. Based on these variables, a risk array is created for each futures option strike price and futures contract.
A worst-case risk array for a short call , for example, would be futures limit extreme move up and volatility up. Obviously, a short call will suffer from losses from an extreme limit move up of the underlying futures and a rise in volatility. SPAN margin requirements are determined by a calculation of possible of losses. The uniqueness of SPAN is that, when establishing margin requirements, it takes into account the entire portfolio, not just the last trade.
The margining system used by the futures options exchanges provides a special advantage of allowing Treasury bills to be margined. Interest is earned on your performance bond if in a T-bill because the exchanges view Treasury bills as marginable instruments.
Because of their liquidity and near-zero risk, T-bills are viewed as near- cash equivalents. Because of this margining capacity of T-bills, interest earnings can sometimes be quite sizable, which can pay for all or at least offset some of the transaction costs incurred during trading—a nice bonus for option writers. SPAN itself offers one key advantage for option traders who combine calls and puts in writing strategies. Net option sellers can often receive favorable treatment.
Here's an example of how you can acquire an edge. SPAN assesses total portfolio risk, so, when and if you add a put credit spread with an offsetting delta factor i. Since SPAN is logically looking at the next day's worst-case directional move, one side's losses are largely offset by the other side's gains. It is never a perfect hedge , however, because 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 does not double charge you for initial margin on this type of trade, which is known as a covered short strangle because one side's risk is mostly canceled by the other side's gains. This basically doubles your margin power. An equity or index option trader does not get this favorable treatment when operating with the same strategy.
While there are other types of trades that would illustrate the advantages of SPAN, the covered short strangle example shows why index and equity option writers remain at a competitive disadvantage. National Futures Association. Accessed Oct. CME Group. Trading Instruments. SPAN evaluates overall portfolio risk by calculating the worst possible loss a portfolio of derivative and physical instruments might incur over a specified period typically one trading day.
It does this by computing the gains and losses the portfolio would incur under various market conditions. The core of the methodology is the SPAN risk array, a set of numeric values that indicate how a particular contract will gain or lose value under various conditions. The numeric value for each risk scenario represents the gain or loss that that particular contract will experience for a particular combination of price or underlying price change, volatility change, and decrease in time to expiration.
At the time they began developing SPAN, methods for calculating margin requirements did not accurately capture the true risk for a combined portfolio of futures and options. Kilcollin and Emanuel proposed a risk-based method for evaluating a portfolio's performance bond requirements. Another CME economist, Jerry Roberts , took that method and made it compatible with the industry's back offices. Over the years, SPAN has become the industry standard for portfolio risk assessment.
It is the official performance bond margin mechanism of 50 registered exchanges , clearing organizations , service bureaus and regulatory agencies throughout the world. The SPAN software is used by futures commission merchants FCMs , investment banks , hedge funds , research organizations, risk managers , brokerage firms and individual investors everywhere.
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. For options writers, SPAN margin requirements for futures options offer a more logical and advantageous system than ones used by equity options exchanges.
It is, however, important to point out that not all brokerage houses give their customers SPAN minimum margins. If you are serious about trading options on futures, you must seek out a broker who will provide you with SPAN minimums.
The beauty of SPAN is that after calculating the worst-case daily move for one particular open position, it applies any excess margin value to other positions new or existing requiring margin.
Margin rules differ across the various options exchanges. The latter two use the SPAN system. Futures exchanges predetermine the amount of margin required for trading a futures contract, which is based on daily limit prices set by the exchanges.
The predetermined amount of margin required allows the exchange to know what a "worst-case" one-day move might be for any open futures position long or short. Risk analysis is also done for up and down changes in volatility, and these risks are built into what is known as risk arrays. Based on these variables, a risk array is created for each futures option strike price and futures contract. A worst-case risk array for a short call , for example, would be futures limit extreme move up and volatility up.
Obviously, a short call will suffer from losses from an extreme limit move up of the underlying futures and a rise in volatility. SPAN margin requirements are determined by a calculation of possible losses. The uniqueness of SPAN is that, when establishing margin requirements, it takes into account the entire portfolio , not just the last trade. The margin system used by the futures options exchanges provides a special advantage of allowing T-bills to be margined.
Interest is earned on your performance bond if in a T-bill because the exchanges view T-bills as marginable instruments. These T-bills, however, do get a " haircut ," which is 0. Because of their liquidity and near-zero risk, T-bills are viewed as near- cash equivalents.
Because of this margining capacity of T-bills, interest earnings can sometimes be quite sizable, which can pay for all or at least offset some of the transaction costs incurred during trading; a nice bonus for options writers.
SPAN itself offers one key advantage for options traders who combine calls and puts in writing strategies. Net options sellers can often receive favorable treatment. Here's an example of how you can acquire an edge. SPAN assesses total portfolio risk, so when and if you add a put credit spread with an offsetting delta factor—that is, the call spread is net short 0. Since SPAN is logically looking at the next day's worst-case directional move, one side's losses are largely offset by the other side's gains.
It is never a perfect hedge , however, because 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 does not double charge you for the initial margin on this type of trade, which is known as a covered short strangle because 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 does not get this favorable treatment when operating with the same strategy.
In options trading, SPAN margin functions as collateral to cover against possible adverse price movements. SPAN is the minimum margin requirement needed to transact a futures or options trade in the market. The margin requirement is a standardized calculation of portfolio risk. When borrowing money to purchase stocks, also known as buying on margin, interest accrues daily and is charged to an account monthly. The interest amount is automatically debited from an account's existing funds.
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