Comment on Basics on Options Shorting/Writing

Kunal commented on 19 Jan 2015, 12:01 AM

Hello Nithin,

You are doing great job by answering so many user queries. I have tried searching lot on SPAN and there is not much clear information available which can explain how SPAN works. I guess one has to experience SPAN by trading only and such experiences are quiet expensive 🙂

I have following doubts regarding SPAN and Exposure margin as I was testing few scenarios.
For NIFTY Short Strangle Position : Sell OTM – Mar-15 : Put 7500 & Call 9200

1. Exposure margin is calculated twice which is big blow to retail investor as it blocks great amount of capital.
2. SPAN requirement of each leg is added while doing margin calculation. This is another step where significant capital is blocked. Shouldn’t this be highest SPAN requirement out of 2 legs ?

NIFTY is cash settled and European index so why margin is blocked for each side of short leg when only one condition can be true at expiry. There is no exercise before expiry so no risk of early assignment.

I read your comments above regarding concern that trader may square of 1 leg of position leaving other short position open. Hence you calculate margin for sell side. However SPAN software which I believe runs multiple times on a day on entire portfolio should be able to catch such situation almost realtime or at end of day.
Shouldn’t SPAN which is designed to access risk of entire portfolio to reduce margin requirement ?

My point is that for spread and strange, investors are not getting real benefit of SPAN by reducing margin requirement based on risk level.

Can you please comment on this.

Thanks,
Kunal.

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