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+Chapter 34: Futures and Futures Options 667 
+SPAN Margin. The SPAN margin system (Standard Portfolio ANalysis of Risk) 
+is used by nearly all of the exchanges. SPAN is designed to determine the entire risk 
+of a portfolio, including all futures and options. It is a unique system in that it bases 
+the option requirements on projected movements in the futures contracts as well as 
+on potential changes in implied volatility of the options in one's portfolio. This cre­
+ates a more realistic measure of the risk than the somewhat arbitrary requirements 
+that were previously used (called the "customer margin" system) or than those used 
+for stock and index options. 
+Not all futures clearing firms automatically put their customers on SPAN mar­
+gin. Some use the older customer margin system for most of their option accounts. 
+As a strategist, it would be beneficial to be under SPAN margin. Thus, one should 
+deal with a broker who will grant SPAN margin. 
+The main advantages of SPAN margin to the strategist are twofold. First, 
+naked option margin requirements are generally less; second, certain long option 
+requirements are reduced as well. This second point may seem somewhat unusual 
+- margin on long options? SPAN calculates the amount of a long option's value that 
+is at risk for the current day. Obviously, if there is time remaining until expiration, a 
+call option will still have some value even if the underlying futures trade down the 
+limit. SPAN attempts to calculate this remaining value. If that value is less than the 
+market price of the option, the excess can be applied toward any other requirement 
+in the portfoliol Obviously, in-the-money options would have a greater excess value 
+under this system. 
+~ 
+How SPAN Works. Certain basic requirements are determined by the futures 
+exchange, such as the amount of movement by the futures contract that must be mar­
+gined (maintenance margin). Once that is known, the exchange's computers gener­
+ate an array of potential gains and losses for the next day's trading, based on futures 
+movement within a range of prices and based on volatility changes. These results are 
+stored in a "risk array." There is a different risk array generated for each futures con­
+tract and each option contract. The clearing member (your broker) or you do not 
+have to do any calculations other than to see how the quantities of futures and 
+options in your portfolio are affected under the gains or losses in the SPAN risk array. 
+The exchange does all the mathematical calculations needed to project the potential 
+gains or losses. The results of those calculations are presented in the risk array. 
+There are 16 items in the risk array: For seven different futures prices, SPAN 
+projects a gain or loss for both increased and decreased volatility; that makes 14 
+items. SPAN also projects a profit or loss for an "extreme" upward move and an 
+"extreme" downward move. The futures exchange determines the exact definition of 
+"extreme," and defines "increased" or "decreased" volatility.