When trading futures and options, it is important to have a good idea as to what the margin requirement on the trade will be and what it can potentially become under certain circumstances. Exchanges establish margins to ensure a good faith deposit against a reasonable one day movement in the position. In options and futures contracts, this margining is established through the CME's SPAN System.

Each Clearing House establishes a margin on its products with the goal of collecting a good faith deposit to protect against at least 97% of the potential one day portfolio moves. In a position with just futures contracts, this margin requirement usually equals a value approximately equal to the second largest dollar value of the day to day change in the futures contract in the last thirty trading days. The Clearing Houses will also look at the historical and implied volatilities of the underlying futures contract to ascertain a reasonable margin. This figure will then be used to establish a maintenance margin level.

Margining a single option or portfolio of options is what SPAN was really designed for. CME's SPAN uses a technique of examining what a portfolio stands to lose based a number of different parameters including the margin requirement or performance bond, the volatility scan range or the potential change of implied volatility, the short option minimum or the value the Clearing House will charge for a short option no matter how little its calculated risk. At this point, SPAN does its own “stress test” and determines what the largest potential loss for the portfolio will be under the pre-chosen parameters. This potential loss becomes the maintenance margin for the account. If the account merits an initial maintenance, SPAN will bump it up to the appropriate level.

SPAN and stress testing have many similar qualities. They provide the trader with an ability to see their profit and loss profiles under certain trading scenarios. It is important to understand when you might get flushed out due to an increase in margins. Understanding SPAN is essential to this part of the analysis. As Head of Risk Management and New York Board of Trade/ICE Futures I had the opportunity to work with an excellent Margin Committee to establish margins to protect the Clearing House and Clearing Members. If you would like to learn more about the Margining Process of Futures and Options or the Settlement of Exchange Traded Options, please give me a call at 347-949-4546 or at 212-383-9453.

FUTURES AND OPTIONS TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. INFORMATION IS OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, BUT IS IN NO WAY GUARANTEED. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS