The SPAN Margin system is used by major futures and options markets to determine the minimum amount of margin required to cover the risk of a one-day loss. It considers the entirety of a portfolio’s trades and allows excess margin to be transferred between positions. The system analyzes a portfolio’s variables and puts options through 16 possible profit or loss scenarios to determine the required margin. This allows traders to deposit less money to carry more options and earn interest on yield bonds used for margin options.
SPAN Margin is the leading margin management system used by most major futures and options markets. Short for standard portfolio risk analysis, the SPAN margin system uses a series of complicated algorithms to determine the minimum amount of margin that holders of stock or futures options must have to cover the risk of a maximum one-day loss. . There are many advantages to this system, including the fact that it allows excess margin on one position to be transferred to other positions within a portfolio. Additionally, SPAN also takes into account the entirety of a portfolio’s trades rather than just the most recent position taken.
Options and futures trading require different margin determinations than stock trading. When a person trades stocks, he essentially gets a loan from a broker to buy larger amounts of shares than the trader initially gives up in principal. An option margin, which is the amount of money that must be deposited into an account to trade options, comes in the form of a deposit of performance bonds. The SPAN Margin System, first developed by the Chicago Mercantile Exchange and now adopted by most major futures and options exchanges worldwide, analyzes a specific portfolio and determines the amount of margin the trader should put up. initially.
The SPAN model takes into account some of the variables that affect options trading, such as the price of the underlying commodity, the time the option has until expiration, and the volatility of the underlying asset. It then puts the different options through 16 possible profit or loss market scenarios. This system then produces a number that the trader must have in order to trade options in that particular market, a number that can change daily due to market volatility.
This allows the trader to deposit less money to carry more options, which also helps the markets as it encourages more trading. An exchange that did not use the SPAN margin system would require the trader to put up a certain amount of margin for each position they hold. By combining all positions within a portfolio and allowing stronger positions to balance riskier options, the system is beneficial to the options trader.
There are other advantages to traders using an exchange that uses the SPAN margin system. Since the yield bonds used for margin options typically come in the form of short-term treasury bills, these bonds can earn interest. Merchants can use this interest to pay transaction costs incurred during trading. In addition, the SPAN system allows benefits for writers of call and put options, since they partially balance the level of risk when analyzing the entire portfolio.
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