If you write an option contract, you have a potential obligation to the market because the taker of the option may exercise their position. A margin is an amount that is calculated by ASX Clear as necessary to ensure that you can meet that obligation.
Margin obligations may arise from:
- written call option contracts
- written put option contracts
- both taken and written LEPO positions
- futures positions
How margins are calculated
ASX Clear calculates margins using the CME SPAN margining calculation engine.
The total margin for ETOs is made up of two components:
- the premium margin is the market value of the particular position at the close of business each day. It represents the amount that would be required to close out your option position
- the initial margin covers the potential change in the price of the option contract assuming the assessed maximum probable inter-day movement in the price of the underlying security. To calculate the Initial Margin, CME SPAN 4.0 uses the published price scan range (also referred to as the margin interval). The price scan range is determined through various observations of the price (or underlying price) over a period of time.
If you have a number of option positions open , the margin calculation engine will evaluate the risk associated with your entire options portfolio and calculate your total margin obligation accordingly. It is possible that some option positions may offset others, leading to a reduction in your overall obligation.
How margins are met
Your broker will require you to provide cash or collateral to cover your margin obligations to ASX Clear.
There is a range of collateral that is acceptable to ASX Clear. See acceptable collateral for details.
From 14 October 2002 you are able to offset the credit premium of bought option positions against futures initial margin liabilities.
Unlike ordinary exchange traded options, where only the writer is margined, with LEPOs both takers and writers are margined.
This is because the taker of a LEPO does not pay the writer the full premium up front. Instead the taker pays a fraction of the premium to ASX Clear and is margined on the balance outstanding.
To find out more about LEPO margining please refer to the ASX Explanatory booklet Understanding LEPOs (PDF 270KB)
Payment of margins
Margins are recalculated on a daily basis to ensure an adequate level of margin cover is maintained.
This means that you may have to increase your level of margin cover if the market moves against you, or your margins may be reduced if the market moves in your favour.
Settlement requirements for trading options are strict. You must pay any margin calls by the time stated in your Client Agreement. Under ASX Operating Rules, this can be no longer than 24 hours after being called.
If you do not meet your margin call in time, your broker can take action to close out your position without further reference to you.