Initial margin calculation SPAN
Let's look at the general idea behind margin and what SPAN futures and option margin are. SPAN provides futures and commodity option strategists with a key advantage: more bang for their margin buck!
What Is Options Margin?
Option margin, very simply, is the money that a trader must deposit into his or her trading account in order to trade options. This is not the same as margining stock. Margin for stocks is actually a loan to you from your broker so that you can buy more stock with less available capital. Margin for options on futures is a performance bond deposit that earns interest because it is usually held in the form of shortterm Treasury bills.
For example, to write a simple bear call spread on the S&P 500, you would need to have sufficient margin (a "goodfaith" performance bond) in your account to open the position. Buying options outright typically does not require any deposit of margin because the maximum risk is what you pay for the option.
For our purposes, margin is what the broker requires you to have in your account if you want to implement an option collected should be 2to1. That is, you should try to find option trades that give you a net premium that is at least onehalf the initial margin costs.
One additional point about option margin is that it is not fixed. In other words, initial margin is the amount required to open a position, but that amount changes every day with the market. It can go up or down depending on changes in the underlying, time to expiration and levels of volatility. SPAN margin, which is the margin system developed by the Chicago Mercantile Exchange (CME) and used by all traders of options on futures, can help explain how this movement works. SPAN margin is considered by many to be the superior margin system available.
The SPAN System
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 worstcase daily move for one particular open position, it applies any excess margin value to other positions (new or existing) requiring margin.
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 worstcase 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.
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Futures Trading Strategy — Inside Futures
Overpriced and overcomplex futures contract trading strategies that include complex formulas and multiple lagging indexes are generally not conducive to successful futures trading.
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