Standardized Portfolio Analysis of Risk (SPAN), a well-known system that many options and futures exchanges around the world have adopted, is used to determine the SPAN margin. The SPAN system is built on a complex set of algorithms that analyze the one-day risk for a trader’s account globally (across their whole portfolio). There are many benefits to using Span Calculator.
The amount of money a trader must put into a trading account in order to trade options is referred to as the option margin. Margining stock is not the same as this. In reality, the margin for stocks is a loan from your broker that enables you to purchase more stock with less accessible capital. The margin for options on futures is typically stored in the form of short-term Treasury bills, which makes it a performance bond deposit that pays interest (T-bills). The SPAN system sets the margin of each position in a portfolio of physical and derivative instruments to its estimated worst-case one-day move using its algorithms.
You should always know about “what is span margin”. It is determined using a risk array that establishes each contract’s gains or losses for many scenarios. These circumstances—also known as risk scenarios—measure earnings (or losses) in relation to changes in price, volatility, and shortening of the time to expiration.
Strike prices, risk-free interest rates, changes in the values of the underlying securities, increases in volatility, and shortening of the time before expiration are the major inputs to the models. The system can transfer any surplus margin on current positions to new positions or existing positions that are short of margin after calculating the margin of each position.
Advantages of SPAN
- T-bills can be margined using the margining method employed by the futures and options exchanges, which is a distinct benefit. Your performance bond will collect interest if it is held in a T-bill since the exchanges consider T-bills to be marginal products. But these T-bills do undergo a “haircut,” which at the CME is 0.5% but may vary depending on the clearinghouse.
- For options traders who use calls and puts in creating strategies, SPAN itself offers one significant advantage. Sellers of net options frequently enjoy favorable treatment.
- T-bills are thought of as being close to cash equivalents due to their availability and almost low risk. T-bills’ ability to be used as a margin makes their interest payments occasionally rather significant, which can help option writers by covering all or at least some of their trading expenses.
The SPAN margin requirements for futures options provide options writers with a more sensible and beneficial mechanism than those employed by stock options exchanges. However, it’s crucial to note that not all brokerage firms offer their clients SPAN minimum margins. You must look for a broker who will give you SPAN minimums if you are serious about trading options on futures.
The special feature of SPAN is that it allocates any surplus margin value to additional positions (new or existing) requiring margin after computing the worst-case daily move for one specific open position. For up and down fluctuations in volatility, risk analysis is also performed, and these risks are included in what is referred to as risk arrays. For each futures contract and futures option strike price, a risk array is built based on these factors.