Futures and options market definition
This is because if the underlying stock went up in value and the contracts were exercised you would be able to simply sell the holder of the contracts the stock that you already owned. Although you would obviously be selling the stock at a price below the market value, there is no direct cash loss involved when the contracts are exercised. You could also write put options without the need for a margin if you held a short position on the relevant underlying security. It's also possible to avoid the need for a margin when writing options by using debit spreads.
When you create a debit spread, you would usually be buying in the money options and then writing cheaper out of the money options to recover some of the costs of doing so. Assuming you buy the same amount of contracts as you write, your losses are limited and there is therefore no need for margin. There are a number of trading strategies that involve the use of debit spreads, which means there are plenty of ways to trade without the need for margin.
However, if you are planning on writing options that aren't protected by another position then you need to be prepared to deposit the required amount of margin with your options broker. In reality, even if you are trading futures options this isn't something you really need to concern yourself with.
However, you may hear the term used and it can be useful to know what it is. The SPAN system was developed by the Chicago Mercantile Exchange in , and is basically an algorithm that's used to determine the margin requirements that brokers should be asking for based on the likely maximum losses that a portfolio might incur.
SPAN calculates this by processing the gains and losses that might be made under various market conditions.
As we have mentioned, it's far from essential that you understand SPAN and how it's calculated, but if you do trade futures options then the amount of margin your broker will require will be based on the SPAN system. Full Explanation of Margin Margin is a very widely used word in financial terms, but it's unfortunately a word that is often very confusing for people. Section Contents Quick Links. Profit Margin Profit margin is a term that is commonly used in a financial sense in a variety of different situations.
Margin in Stock Trading You may hear people refer to buying stocks on margin, and this is basically borrowing money from your broker to buy more stocks. Margin in Futures Trading Margin in futures trading is different from in stock trading; it's an amount of money that you must put into your brokerage account in order to fulfill any obligations that you may incur through trading futures contracts. Margin in Options Trading In options trading, margin is very similar to what it means in futures trading because it's also an amount of money that you must put into your account with your broker.
Risk-return profile is symmetric in case of single stock futures whereas in case of stock options payoff is asymmetric. Also, the price of stock futures is affected mainly by the prices of the underlying stock whereas in case of stock options, volatility of the underlying stock affect the price along with the prices of the underlying stock. What are Stock Futures?
How are Stock Futures priced? What are the opportunities offered by Stock Futures? How are Stock Futures settled? Can I square up my position? What are the opportunities offered by Stock Futures? How are Stock Futures settled? Can I square up my position? When am I required to pay initial margin to my broker?
Do I have to pay mark-to-market margin? What are the profits and losses in case of a Stock Futures position? What is the market lot for Stock Futures?