SPAN Margin Methodology

Margining every futures and options position separately and adding up the requirements punishes a portfolio that is actually well-hedged — a long call and a long put on the same underlying don't lose money at the same time, so they shouldn't each demand full margin as if they did. SPAN (Standard Portfolio Analysis of Risk), developed by the CME and now used by most derivatives clearinghouses, was built specifically to margin a portfolio as a whole against its realistic worst case, not position by position.

How the scenario grid works

SPAN defines a standard set of "risk arrays" — typically 16 scenarios per product, combining several price moves (say, up and down by fractions and multiples of a defined range) with two volatility scenarios (up and down):

$$Margin = \max_{i \in \text{scenarios}} \left( -\sum_{j} \Delta V_{i,j} \right)$$

In words: for each scenario $i$ in the grid, revalue every position $j$ in the account and sum the change in value; the margin requirement is whichever scenario produces the largest total loss. A portfolio where losing positions are offset by gaining ones in the same scenario needs far less margin than the sum of each position's individual worst case.

Worked example

A trader holds a long futures contract and a long put option on the same underlying — a protective position. Priced position by position, the futures alone could lose $50,000 in a down move, and the put alone requires $8,000 of margin against time decay and vol risk, suggesting roughly $58,000 if margined separately. Under SPAN, the scenario grid reprices both together: in the down-move scenario, the futures loses $50,000 but the put gains roughly $44,000, netting to a $6,000 loss in that cell. Scanning all 16 cells, the worst combined loss across the grid comes to $14,000 — the actual SPAN margin requirement, less than a quarter of the naively summed number, because the grid captures the hedge.

What this means in practice

SPAN is why a well-constructed hedged futures and options book can trade with dramatically less capital tied up than the same positions held unhedged, and why clearinghouses can offer that capital efficiency without taking on more risk themselves — the margin still covers the portfolio's actual worst plausible day, just computed correctly instead of position by position.