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