Span Margin requirement

General
1

As per my understanding span margin is the largest loss that can occur to a portfolio in a day. Now let us consider the following 3 scenarios of 31Dec expiry:

  1. Sell 17100 Call - Span Margin ~16300

  2. Sell 16800 Put - Spam Margin ~ 16800

  3. Sell 17100 Put and 16800 Call - Span Margin 33100 (??)

For the 3rd scenario the largest loss would be the max of 1) and 2) as loss would only be in either of the two and not both of them. So ideally the Span Margin should be Max(16800,16300) which is 16800 in this case. But the calculator is adding both the margins, why is this so? Is this mandated by the exchange or is an internal policy?

2

SPAN margin requirement is as per exchange and not a brokers internal policy.

Even though the risk is limited once the position is taken, there is always an execution and liquidty risk.

So for exiting one of the two positions, what if you place a market order and take a big hit? What if one side of the option contract loses all liquidity and the other is not. You could very easily exit the profitable liquid one, and not be able to exit the loss making illiquid one posing quite a big risk.

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3

Dear Nithin,

Absolute no margin benefit for the above case is quite cruel…Can something be done?

Even the exposure margin is becoming twice…

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4

But liquidity risk is not something unique to this strategy. If it is part of Span then it would have already been considered in the calculation for each side.
Can something be done at your end to get some margin benefit in such cases.