# Why does buying future options require margin?

An option is the right, but not the privilege, to trade an underlying at the strike price. Buying a stock option doesn't require any margin - I've just tested this with InteractiveBrokers, trying to buy an AAPL put.

However, buying an ES futures option (call or put) requires quite a hefty margin (1575 initial, 1056 maintenance). What is the justification for that?

As the buyer, I pay the option premium, which is the maximum I can lose (50*11.25 = 562.50), no?

• - it may be that margin is pre-required for the expiry - when you rcv futures .. . .
– rrg
Dec 8 '16 at 12:01
• Regrettably I do't have access to the margin that the CME charges for this, so I can't look it up right now (maybe someone else can). But I agree that this looks outrageous. Dec 9 '16 at 15:10

Improvements:

Futures options, as well as futures margins, are governed by the exchange through a calculation algorithm known as SPAN margining. For information on SPAN and how it works, please research the exchange web site for the CME Group, www.cmegroup.com. From their web site you can run a search for SPAN, which will take you to a wealth of information on the subject and how it works. The Standard Portfolio Analysis of Risk system is a highly sophisticated methodology that calculates performance bond requirements by analyzing the “what-ifs” of virtually any market scenario.

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Initial margin, also known as the total performance bond, is the term applied to the initial deposit or margin money each customer is required to put up as security for a guarantee of contract fulfillment at the time a futures or option position is established. Initial margin requirement has two components: the risk component and the equity component. The risk component is the risk level determined by SPAN (“Standard Portfolio Analysis of Risk”), which is a market simulation-based Value at Risk system. The equity component is the net option value, which will be discussed in the following section. The margin rates used for calculating initial margin requirements for CME Group’s futures and options products are available online. The requirement amounts for specific portfolios are calculated using SPAN.

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SPAN evaluates overall portfolio risk by calculating the worst possible loss that a portfolio of derivative and physical instruments might reasonably incur over a specified time period (typically one trading day). This is done by computing the gains and losses the portfolio would incur under different market conditions.

At the core of the methodology is the SPAN risk array, a set of numeric values that indicate how a particular contract will gain or lose value under various conditions. Each condition is called a risk scenario. The numeric value for each risk scenario represents the gain or loss that particular contract will experience for a particular combination of price (or underlying price) change, volatility change, and decrease in time to expiration.

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These Scan Risk Scenarios provide sixteen different potential market scenarios and show the associated gain/loss per Contract. The chart below displays the sixteen risk scenarios.

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As you can see from the risk scenarios for the Call options on the ES Futures, there are negative values generated from their models. I currently do not have details of their models and thus cannot tell how exactly these results have been obtained. But the basic principle is this.

• One-liners with a link to external material are not the preferred format on Stack Exchange. Currently this is more like a comment than an answer. But you could summarize the main points behind the link, which would make your answer more useful and self-sufficient. Dec 10 '16 at 21:32
• Users are not allowed to comment with less than 50 reputation points. But yeah, will improve my post as soon as I will have time.
– AK88
Dec 11 '16 at 14:21
• Can you maybe improve your post now? Jan 25 '18 at 22:29
– AK88
Feb 26 '18 at 4:00

The answer given by AK88 is good.

To put it in simpler terms it is because a "futures account" (holding futures and options on futures) works differently from a "stock account" holding stocks and options on stocks or indexes). At Interactive Brokers you have a single account, but it is divided into separate futures and stocks subaccounts that work according to these different conventions.

In a stock account when you buy an asset, cash is deducted from your account, in a futures account when you "buy" something (more correctly when you open a long position) cash does not disappear but is "earmarked" or set aside in the form of a margin requirement; cash leaves or enters the account only because of daily mark to market of your existing positions (or of course when you personally take money out or put more in).

• True. Still does not answer the original question though. On buying a single emini option priced at 11.25 the most he can lose is 50*11.25 = 562.50, so it seems strange that IB is charging an initial margin three times higher than this i.e. 1575. I wonder what the exchange margin is? Can't be that high, surely IB is overcharging. Dec 9 '16 at 14:54
• So how does one transfer cash to ones futures account? Jan 18 '21 at 16:59

It has already been answered why margin exists and roughly how it calculated. "Options on futures employ an entirely different method known as SPAN margining", which is basically CME Group's take on a multi-scenario weighted conditional VaR. I will attempt to provide additional insight on the other part of the question as to why IB's margin requirements on future options are excessive.

IB's requirements are indeed excessive. In fact, as you point out, they are almost triple the risk (\$562.5) for an initial position (\$1575) and double for maintenance (\\$1056). This exceeds the margin requirements imposed by the CME Group :

Long option value is always greater than the span risk that is calculated because we understand that you cannot lose more than what you have paid for a long option.

It has also been proposed that this could be due to futures settlement. This also is not true. According to the product specs, e-Mini S&P Futures are cash settled. Moreover, the numbers you are given do not jive with the margin requirements for S&P E-mini Futures:

...nor those margin requirements provided by IB:

In my mind, there are two possible reasons that IB would impose excessive margin requirements:

1. Unintended error on behalf of the software/risk folks (e.g., bungling algorithm)
2. Intentional risk gouging to discourage risk taking and/or to increase IB's cash reserves

The only way to be sure what is going on is to call IB's risk management office. From my experience, unless you are an institutional client, you will be put on hold for a long time.