What is SPAN Margin?

SPAN margin is calculated by standardized portfolio analysis of risk (SPAN), a leading system that has been adopted by most options and futures exchanges around the world. SPAN is based on a sophisticated set of algorithms that determine margin requirements according to a global (total portfolio) assessment of the one-day risk for a trader's account.

Key Takeaways

  • SPAN Margin determines margin requirements based on a global assessment of the one-day risk for a trader's account.
  • ´╗┐SPAN margins are calculated using risk arrays and modeled risk scenarios.

Basics of SPAN Margin

Options and futures writers are required to have a sufficient amount of margin in their accounts to cover potential losses. The SPAN system, through its algorithms, sets the margin of each position in a portfolio of derivatives and physical instruments to its calculated worst possible one-day move. It is calculated using a risk array that determines the gains or losses for each contract under different conditions. These conditions are referred to as risk scenarios and measure profits (or losses) with respect to price change, volatility change, and decrease in time to expiration.

The main inputs to the models are strike prices, risk-free interest rates, changes in prices of the underlying securities, changes in volatility, and decreases in time to expiration. The system, after calculating the margin of each position, can shift any excess margin on existing positions to new positions or existing positions that are short of margin.