Options On Futures
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You hear it over and over again as a trader, and it takes many different forms: So how do you put this advice into practice? It is a scenario-based algorithm which attempts to compute the maximum loss your account might reasonably incur within one trading day.
The goal is twofold: You can find a lot more detail on the CME website. The CME and most other participating exchanges construct 16 scenarios, in which the prices of the individual markets are assumed to move up or down by varying amounts, while volatility is also assumed to go up or down.
And what if you are holding positions in some closely-related contracts? For example, maybe you are long an ES futures contract and short an NQ. Or perhaps you hold an iron condor spread on GC futures options. Or maybe you put on a CL futures calendar spread. Or maybe you wrote a naked put on EC currency futures far from the money. This is where it gets complicated. SPAN will try lots of different ways of grouping your holdings to compute charges and credits to your overall margin requirement.
So if you add a new contract that truly hedges your existing positions, it will reduce the amount of margin you are required to hold. Exchanges and their clearing organizations must ensure that every trader holds enough margin to cover potential losses. SPAN tries to achieve both of these goals. It consists of four individual contracts, and a naive risk system using quantity limits might charge you four times the margin of holding just one contract.
If you want more functionality and are willing to spend more timeyou can also download the PC-SPAN app from CME and import parameter files for the exchanges you are trading. Using quotes currently in the market, its payoff diagram assuming no early exercise or assignment looks like this:.
How much should we expect to need in margin to hold this position? In this case, SPAN is over 20x more capital efficient compared to a naive quantity limits algorithm. It can enable a trader to responsibly hold many contracts, provided they are properly hedged.
Or a calendar spread in the WTI Crude market? Each spread has its own margin adjustment, and you can see for yourself what it looks like with the online SPAN tool. I have never received a margin call, and if I make it through life without ever having a margin call that will be just fine by me. In none of those cases did the process sound fun.
Some brokers will liquidate your positions immediately and without consulting you as soon as a margin call occurs. Other more civilized brokers will contact you and involve you in the process of either posting more capital or making the necessary liquidations.
But it may not be a cheerful conversation. Best of all is to avoid the situation entirely. This ratio is computed by dividing your required margin by the current market value of your account. The reason is that a fast market move can quickly result in losses, and even if you have a statistical edge, you may find that temporary drawdowns can result in margin calls and become not-so-temporary.
If you are trading in-and-out quickly, with automated stop-loss orders and a global system cutoff, you might be OK with more than that, because your system can be designed to go flat before a margin call can occur. And if you are trading defined-risk options spreads in which your max loss is well known in advance, then you can go much higher and still be safe. Every successful trader knows the importance of managing risk.
I hope it helps you trade more successfully and sleep more peacefully. There is a substantial risk of loss in futures trading. Past performance is not indicative of futures results. Optimus Futures is a leading online futures broker that caters to traders seeking fast execution and stable data feeds combined with aggressive margins and deep discount commissions.
Focus on Factors in Your Control. About Optimus Futures Optimus Futures is a leading online futures broker that caters to traders seeking fast execution and stable data feeds combined with aggressive margins and deep discount commissions.