This article was originally published in The Option Strategist Newsletter Volume 1, No. 30 on June 25, 1992.
Futures option margin requirements for customers are generally more logical than equity or index option requirements. For example, if one has a conversion or reversal arbitrage in place, his requirement would be nearly zero for futures options, while it could be quite large for equity options. Moreover, futures exchanges have recently introduced a better way of margining futures and futures option portfolios -- the SPAN system (Standard Portfolio ANalysis of Risk). SPAN is designed to determine the entire risk of a portfolio, including all futures and options. It is a unique system in that it bases the option requirements on projected movements in the futures contracts as well as potential changes in implied volatility of the options in one's portfolio. This creates a more realistic measure of the risk than the somewhat arbitrary requirements that were previously used (called the "customer margin" system) or than those used for stock and index options.
