Option Margining

Margin Calculation Options

The margin procedure for options is different compared to margining of futures. The difference is the liquidation value of the instruments. Liquidation value is the cost for liquidating the option/futures at the prevailing market price. Futures are subject to a daily “mark-to-market” and cash settlement. The liquidation value for futures will always be zero in the margin calculation.

Option contracts are not ”marked-to-market”, and the cash settlement is done when the contracts are expired. The liquidation value is equal the value of the option. Options are also subjected to price movement risk. The total option margin then consists of two margin components, the value of the option and a change cost to cover price movement.

 Total option margin  = Value of the option + Change Cost                                     

                                       = Most unfavourable value of the option

The value of the option is calculated by using industry standard option formulas^[1].  The change cost is proportioned so that it covers the additional losses under the assumption of the most unfavourable price movement in the option price. The risk of a change in implied volatility is taken into account when calculating the change cost with a higher and lower volatility than the current volatility.

 Purchased options will on principle results in a close-out profit with a corresponding margin credit. If applicable, the margin credit is set off against other margins within the same market (ie freight, power etc). Sold options will have a corresponding margin requirement.