Trading as Margin of the Positions in Protrader
Hey there, Protraders!
Today we raise the subject of the exchange functioning and such an important aspect of the trading as margin of the positions. The task range which the exchange performs is pretty wide. Providing of the trading process security is among these tasks. In particular, the exchange monitors that trading participants accomplish the obligations assumed by them in the process of trade activities. With the help of the margin, exchange provides execution of the obligations of both parties entering a trade. Margin system called to guarantee the execution of the trading obligations.
For example, let’s consider the purchase of some futures contract X. To buy futures contract X an investor must have a trading account larger than the value of initial margin by selected contract. Untapped funds on the trading account should be greater than the value of initial margin when opening a trade. Profit and losses on the investor account are recalculated on a daily basis. In other words, the asset reassessment is performed. The investor can withdraw some funds from the account on condition that the account has enough money to ensure the initial margin. To ensure the guarantees of the investor’s paying capacity, the exchange sets the maintenance margin. If due to market movements the account balance falls below maintenance margin the account holder receives a margin call. In this case, the account holder must deposit into the account to fulfill the exchange margin requirements or the position will be liquidated. The exchange sets a lower lath of the initial and maintenance margin, but brokers can add allowance to these values depending on their views on the asset trading risks. Broker can require from the client a higher initial margin but he has no right to decrease it lower than exchange. Margin levels depend on asset volatility, and high volatility leads to high values of the margin. Values of the margin levels also depend on purposes with which trading the account is used. If actions to hedge the cost of commodities by the producer are performed on the trading account, then the margin values for this account will differ from margin requirements for the trading account which is used for speculative purposes. One more factor which can affect the margin level is the value of trading account, for large trading accounts the values of the margin can differ from margin for small accounts. Thus, broker’s policy in the margin assessment has a meaningful impact on trading results.
As it was said above, the value of maintenance margin changes depending on the measure of asset volatility, in other words, the maintenance margin levels can change with a change in volatility. The same principle of margin is used during the stock options trading. Exchanges apply different methods of the margin requirements calculation. The most common method is the SPAN.
Thus, for successful trading activity the investor must understand what will be the margin when opening one or another position. But not always the information about margin is accessible to the investor in the trading terminal. It gives a well-known discomfort and the need to specify the required parameters of the assumed trade in the third-party sources. The possibility of margin requirements assessment when trading futures and options is implemented in the Protrader terminal. The calculation method implemented in the module “Option master” gives estimated values of margin that adequately meet the margin calculated by the SPAN method.
To determine the margin level of option position we need to go to the module “Option master”.
Next, open the options desk and choose the strike price of the option which you are interested in and select volume and side of the position in the row “Trade”. As an example, let’s sell one Put option contract on September series of S&P mini index. With strike price of the option equals to 1900.
When activating the information sign, the window becomes available where we can observe indices of the current portfolio, portfolio with analyzed paper positions, and total “greek” values for the portfolio.
We can see that the initial margin is equal to 3515 USD. This suggests that when opening the position the broker will require this amount as the initial margin. In other words, the minimal amount of available funds on the trading account when opening this position equals to 3515 USD. The maintenance margin equals to 3201 USD. It means that in the case of reducing the account balance lower than this value the holder of trading account will receive the margin call. In this case, the holder must deposit additional funds into the account to maintain the position or the position will be liquidated by force. It should be noted that broker’s policy in relation to the margin requirements is quite individual, and its details are discussed when opening a trading account. Rather high requirements for the margin are imposed on option sellers; it is connected with theoretically unlimited risk which they take, selling an option. Let’s consider the opposite situation, and simulate purchase of the option. Let’s buy one Call option contract on December series of S&P mini index. With strike price of the option equals to 2375. It may be noted that this option is far “out of the money”.
In this case, the initial and maintenance margin is equal to zero, since the whole possible risk of bought option is fixed and equal to the premium paid which is immediately deducted from the account balance in favor of the counterparty.
Margin of the positions must necessarily be taken into consideration by trader when calculating the investment portfolio. Incorrect margin assessment can lead to forced closure of the positions or to the need to replenish a trading account. Thanks to the “Option master” functionality the user can accurately simulate the margin of calculated portfolio without leaving the Protrader terminal and without resorting to the third-party services which increases convenience of the trading and saves time.