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. 
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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.