SPAN, and why your margin is not what you expected

Sell a naked put and your broker asks for a large deposit. Buy a further out-of-the-money put against it, turning the position into a spread with a known worst case, and the requirement collapses. Nothing about your view changed. What changed is that the margin system can now see the hedge.

That system, on most futures and options exchanges, is SPAN — Standard Portfolio Analysis of Risk, introduced by the CME in 1988 and licensed by exchanges worldwide. It is not complicated, but it is almost never explained, so people learn its behaviour by being surprised by it.

The idea

Strategy-based margining looks at each position and applies a rule. Portfolio margining asks a different question: across a set of plausible market moves, what is the worst this whole portfolio does in one day? That number, roughly, is your margin.

Because it values the portfolio as a whole, offsetting positions offset. A long call and a short call at a higher strike are not two margin charges; they are one spread with a capped loss.

The risk array

The exchange publishes, for each contract, two parameters: a price scan range — how far it thinks the underlying can move in a day — and a volatility scan range. SPAN then revalues your portfolio under sixteen scenarios built from those two numbers.

Fourteen scenarios walk the price across the scan range in thirds, each paired with volatility rising and falling. The last two are the tail: a move of twice the scan range, counted at a fraction — conventionally 35% — because the exchange wants some charge for a crash without margining every account as though one is due tomorrow.

Your scan risk is the worst loss across those sixteen rows. Note what this implies: the volatility legs mean a short option position can be charged its worst case on a day the underlying does not move at all.

Drag the volatility slider on that strangle and watch the pre-expiry line drop while the expiry line stays put. Rows 1 and 2 of the risk array are exactly that move. This is why short volatility positions get margin calls in quiet markets — the scan found the vol-up scenario, not a price move.

The parts nobody mentions

Scan risk is the headline, but the total is built from four more pieces.

Intra-commodity spread charge. SPAN treats all months of a contract as one underlying, which is generous — a long March and short June future nets to almost nothing. But the months do not move identically, so a charge is added back for calendar spread risk. It is small, and it surprises people who expected a perfectly hedged spread to be free.

Inter-commodity spread credit. Related products get a discount for offsetting. Long crude against short heating oil is genuinely less risky than either alone, and the exchange grants a percentage credit for recognised pairs.

Delivery or spot month charge. Contracts near expiry behave badly — liquidity thins and squeezes happen — so an extra charge applies as delivery approaches.

Short option minimum. The one that catches people. A portfolio of deep out-of-the-money short options can scan to almost no risk, because in all sixteen scenarios the options stay worthless. SPAN refuses to believe this and imposes a floor per short contract. Sell enough far-out-of-the-money options and your margin is set entirely by this minimum, with the scan irrelevant.

The total is roughly:

margin = max(scan risk + intra-commodity charge − inter-commodity credit,
             short option minimum)
             + delivery charge

What this means when you trade

• Defining your risk cuts your margin, often dramatically. Buying the wing on a short position costs premium and buys back a large part of the deposit. This is most of the reason iron condors exist rather than strangles.
• Margin is not static. The exchange raises scan ranges when realised volatility rises — which is precisely when your position is already losing. Requirements expand into a falling market, and forced liquidation is a liquidity event, not a solvency one. That mechanism has ended more accounts than bad directional calls.
• Check the short option minimum before scaling. A strategy that looks capital-efficient at ten contracts may be floored at a hundred.
• Your broker may add to it. SPAN is the exchange's number. Brokers routinely apply a multiplier on top, and retail multipliers can be substantial.

Notes from building one

I built the risk and margin engine at Otkritie — SPAN portfolio margining across futures and options on index, commodity, FX and single stocks, feeding a real-time engine handling over a million updates a second for 400,000 investors. Three things I did not expect going in.

The arithmetic is the easy part. Sixteen revaluations per contract is nothing. The hard part is the reference data: scan ranges, tiers, spread definitions and credit rates change, they arrive as files on a schedule, and a stale parameter produces a confidently wrong number rather than an error.

The second is that the option pricing model inside the margin calculation has to match the one on the trading screen, or clients see a margin requirement that disagrees with their own P&L and — reasonably — do not trust either.

The third is that margin is a real-time obligation, not a report. It has to be right on every tick, because it gates whether an order can be placed at all. That constraint, more than the mathematics, is what makes a margin engine an engineering problem.

Beyond SPAN

Exchanges are migrating from the original algorithm to SPAN 2, which combines a historical-value-at-risk model with a stress component and handles liquidity and concentration more explicitly. The intuition above still holds — scenarios, portfolio offsets, and add-ons for the things a scenario grid misses. The parameters change; the shape of the answer does not.

For the authoritative detail, go to the exchange's own methodology documentation rather than a textbook. It is free, precise, and updated when the rules change.