This booklet explains how ASX Clear calculates margins for options traded on ASX's option market. You should note that brokers' margins may be different from ASX Clear. This is explained further on page 3. Simply stated, margins serve to protect the integrity of ASX's options market. As not all options transactions involve margin payments this booklet explains when they are required, how they are calculated and what options ASX Clear will accept to cover margin obligations. This booklet assumes that you have a basic understanding of the workings trading ASX's options market. You may also find Understanding Options Trading and the LEPO Explanatory Booklet helpful. Copies can be obtained free from our website at www. The terminology associated with margins is explained in the Glossary of Terms on page Throughout this booklet examples are used to explain how the margining system works. All examples assume an option contract size of shares and, for simplicity of explanation, ignore exchange fees or commissions that may also be payable. Examples are provided for illustrative purposes only and may not reflect current market levels. A calculator that enables you to estimate your margin position is available on the ASX website at www. Simply put, the minimum level of cover required to cover margin obligations is the liquidation value of your option contracts. If you only buy options, then margins are not payable. It is when you write options that margins may be payable. Margins are paid to cover your obligations to your broker. Brokers in turn pay these margins to ASX Clear. ASX Clear recalculates margins at the end of each day to ensure an adequate level of margin cover is maintained. ASX Clear then debits or credits your account with your broker according to whether your margin obligation has increased or decreased. Where there is a shortfall in your account you will usually be required by your broker to pay margins within 24 hours. When an obligation to the market no longer exists, all margin amounts are credited back to your account with your broker. For example, the writer of a call option would be required to add to their margin cover if the share price moved up from its current level. This is because the writer has a larger potential obligation under the option contract and may need to buy shares in order to deliver them at the exercise price. If the share price falls, the writer's margin obligations would be reduced. Potential obligations arise from: Please note that margin obligations apply to these situations in isolation. If you establish certain types of option strategies, the margin obligations may be reduced because some positions may offset other positions. Margin offsets are discussed on page 5. The primary objective of requiring margin cover is to ensure that options positions can be liquidated closed out and the obligation removed. This is because you have no obligation to buy the BLD shares. In buying the option you would have already paid a premium to the writer for the right to buy the BLD shares. Like the writer of a call option, the writer of a put option has a potential obligation if the taker of the put decides to exercise their right to sell trading underlying securities. To ensure you can meet your potential obligations you will be booklet to lodge margin cover. In summary, writers of call and put options are required to lodge margin cover because of their obligations which arise from writing options. When you buy an ordinary exchange traded option you are required to pay the entire option premium up front. However, when you buy a LEPO, the initial amount you pay is only a small fraction of the full premium. Therefore ASX Clear requires the taker as well as the writer of a LEPO to lodge margin cover. Takers of LEPOs are margined because they have an outstanding obligation to pay the balance of the premium to the writer. Writers of LEPOs, like writers of ordinary exchange traded call options, may suffer losses booklet the underlying security rises in value, and therefore writers of both LEPOs and ordinary exchange traded call options are required to lodge margin cover. A full explanation of the margining process for LEPOs can be found on page Option writers have a potential obligation to the market because the taker of the option may decide to exercise their position. If the market rises, your written call option could be exercised. Margin obligations are calculated at the end of trading each day and ASX Clear notifies each broker of the margin obligations for each of podcast broker's accounts early the next trading day. As the broker is responsible for the margin obligations to ASX Clear, it is the broker who has the legal obligation to settle with ASX Clear. Each broker's total margin obligations must be lodged with ASX Clear by To enable the broker to settle their daily margin obligations with ASX Clear the broker will generally ensure that their clients have deposited cash or collateral, such as securities or bank guarantees. However, this does not take into consideration the possibility of inter-day price movements. In reality, ASX Clear calculates margins using a sophisticated system known as the ASX Derivaties Margining System ADMSan internally developed replica of understanding CM-TIMS algorithm. ADMS takes into account the volatility of the underlying security when calculating your margin obligations. Volatility refers to the size and frequency of price fluctuations. Generally only one margin call is made each day. However, if the market moves strongly up or down, ASX Clear may call for extra margin cover to be lodged during the day i. ADMS arrives at a margin by calculating two margin components for each position: The sum of these is the total margin. ASX Clear's margining methods calculate the margins required from your broker Clearing Participant. Your broker's margin requirements for your account may be different to those of ASX Clear if your broker uses a different margining standard to ASX Clear. The explanations throughout this booklet apply where your broker adopts the same margining as ASX Clear. A broker may require you to provide cash to enable the broker to meet their margin obligations to ASX Clear. ASX Clear accepts your collateral as a third party, as you are providing it to ASX Clear as security for your broker's margin obligations to ASX Clear. Explanatory broker may explanatory you to provide collateral which is different to what ASX Clear will accept. You should check what collateral your broker will accept. In addition, in the event that your broker's margin podcast is less than the value of collateral which ASX Clear requires at any particular time, your broker may subject to your instructions hold on to that understanding or return it to you. You should check what your broker's practices are, as different brokers use different practices. Details of eligible collateral are published on the ASX website at www. The premium margin is the market value of the particular position at the close of business each day. The risk margin is the difference between the theoretical option price and the current option price. For a call option writer, the worst case scenario would arise if the market rose. Therefore ADMS calculates the theoretical option value of the position or positions held understanding the call writer assuming the underlying security rises by the maximum probable interday amount. For the put option writer, however, the worst case scenario would arise if the market fell. Therefore ADMS calculates the theoretical option value of the position or positions held by the put writer assuming the underlying security falls by the maximum probable inter-day amount. Only writers of exchange traded options have obligations under the option contract, so they face a greater potential loss than an option taker. If there is an adverse market movement the taker understanding the contract can only lose the option premium paid. As a result, ADMS calculates movements in the underlying security which would adversely affect an option writer. That is, ADMS determines the writer's worst case scenario. The premium margin is the current value of the option, while the risk margin protects against possible future losses. For a call option writer, the worst case scenario would arise if the market rose The risk margin covers the potential change in the price of the option contract assuming the assessed maximum probable inter-day booklet in the price of the underlying security. To calculate the additional margin, ADMS uses the published margin interval. The margin interval is determined through various observations over explanatory period for each underlying. The margin intervals for all classes of options are regularly monitored to ensure they remain appropriate. Once the margin interval for a particular class of booklet has been determined, ADMS uses the range set by the margin interval to determine the price movement in the underlying security which would cause the maximum loss to your option position. The table below highlights the worst case scenario for a writer of a call or a put option. Benefits because put options lose value in a rising market loses because put options increase in value in a falling market. See the table below for a further explanation. If you have a number of options positions registered in your account ADMS will evaluate the entire options portfolio and calculate total margin obligations accordingly. ADMS calculates options margin obligations for all options in one class together. This podcast how ADMS analyses daily price movements in the underlying security and calculates the worst case scenario for all written positions. This process is repeated at the close of business each day until the position expires, is exercised or is closed out. Firstly, ADMS uses the margin interval to calculate the maximum probable interday rise and fall in podcast underlying security. Secondly, ADMS uses these prices asx calculate the theoretical value of each position in the portfolio. The total margin is the sum of the risk margin and the premium asx for a particular position. You may have noticed that in the options examples the total margin payable is the same as the theoretical price of the option podcast by assuming the price of the asx security has risen or fallen by the maximum probable daily price movement to give the worst case scenario. This is shown in the table on the next page. ADMS calculates the risk margin for each position by multiplying the difference between the theoretical value and the current value of the option position by the number options contracts held and the number of underlying securities per option contract. ADMS then adds together the risk margins for each of the different series. In adding these together ADMS treats favourable underlying price movements as positive credit and unfavourable underlying price movements as negative debit. Offsets are allowed within a security and across a multi-security portfolio. The way offsets work is explained in the following sections. As mentioned earlier the premium margin is based on the current market value of the position. Where a portfolio has both long and short positions over the same underlying security the premium margin is calculated by subtracting the market value of the long positions from the market value of the short positions. In other words, the net premium margin is obtained by subtracting the taken positions from the written positions. For example, you have one taken ANZ option and four written ANZ options so the premium margin from the taken position will serve to reduce the premium margins on the written positions as shown in the table below. Where you have a portfolio comprising options over a number of different underlying securities, ADMS calculates the risk and premium margins for the portfolio in a 4 step process:. The asx and premium margins for each underlying security are calculated as if they were separate portfolios. Next, ADMS calculates the total premium margin for the whole portfolio by adding the individual premium margins calculated in step 1. Trading uses the margin interval to calculate the maximum probable inter-day move in a security. ADMS calculates theoretical prices at 5 equi-distant levels on the upside and 5 equi-distant on the downside based upon the maximum probable inter-day move. Upside risk when the underlying asx rises in price and downside risk when the underlying security falls in price is calculated for each position in the portfolio. ADMS then groups positions according to the underlying security and sums the upside and downside risk. Note that while a net written position i. This is because the value of your bought option contracts is enough to offset the obligations arising from any sold option contracts. Once ADMS has calculated the risk margin i. This process is best illustrated by two examples, one for a portfolio of options over the same underlying security, trading two for a multiple security portfolio. In order to calculate the total risk margin, ADMS calculates the theoretical value of these options by assuming the price of RIO shares moves up or down by the margin interval. Remember that ADMS first calculates risk and premium margins for all options over each underlying security as if they were separate portfolios:. In this example the worst case for the AMP holding is if the AMP share price rose, the worst case for the BXB holding is if the BXB share price rose, and trading worst case for the DJS holding is if the DJS share price fell. Above is another example of the margining process for a multiple security portfolio, assume your portfolio has options positions in Lihir Gold Ltd LGLFoster's Group Ltd FGL and Fairfax Holdings Ltd FXJ. ADMS calculates the above premium and risk margins. In this instance the risk in the portfolio is largest on the downside. As the risk is greater on the downside, the credit arising from the FGL positions is used to partially offset the total risk margin. To understand the margining process for Low Exercise Price Options LEPOs you should first read the LEPO Explanatory Booklet which sets out the features and benefits of LEPOs. This booklet can be downloaded from the ASX website, at www. This is because the taker of a LEPO does not pay the writer the full premium up front. As such, the taker is margined as they have an obligation to pay the premium. The risk margin covers the change in the price of an option assuming a maximum probable inter-day movement in the price of the underlying security. Just like ordinary options, the calculation of the risk podcast for a LEPO is based on the margin interval of the underlying security. Since the price of the LEPO moves in line with the price of the underlying security, the risk margin for a LEPO is calculated podcast multiplying the margin interval by the price of the underlying security and the number of shares in the contract usually As the value of the underlying security changes so too will the amount of risk margin. LEPO investors can lodge the same types of collateral as investors in ordinary exchange traded options to cover their risk margins. However, mark-to-market margin obligations must be settled daily by the payment of cash. This is because for every investor required to pay a mark-tomarket margin there is another investor entitled to receive an equivalent mark-to-market margin payment in cash. This cash-in, cash-out process means mark-to-market margin obligations cannot be settled by non-cash collateral. The premium margin for an ordinary exchange traded option represents the market value of the option at the close of trading each day. For a LEPO, however, the premium margin is the difference between the closing prices of the LEPO from one day to the next. The margin is calculated by marking the position to the LEPO's current market value. This is further explained in the following example which looks at the margining process for both the taker and the writer of a September LEPO over shares in AMP Limited AMP. The example covers five trading days. A asx payment by the investor is abbreviated as Explanatory. A cash receipt to the investor is abbreviated as RCT. Only cash is applied to meet risk margin obligations. There are shares per contract. Explanatory ensure the writer can meet their potential obligations in the event of an adverse market movement in the price of AMP shares, the writer is options to lodge margin cover. As the price of the LEPO has not moved from the time of trading to the close of trading on day 1 there is no mark-to-market margin payable for day 1. The LEPO price fall also results in another mark-to-market margin adjustment. The further decline in the LEPO price will mean the taker making another mark-to-market margin payment. Closing out involves the writer buying the same LEPO series they initially sold and the buyer selling the same LEPO series they initially bought. Once the closing out transaction is registered ASX Clear makes the following margin adjustments:. While the position is closed out on day 5 the opening written LEPO is firstly marked-to-market just as for previous days. As the LEPO price has fallen yet again it results in a further mark-to-market margin adjustment. The writer of the LEPO now has no options obligations. The taker of the LEPO now has no further obligations. The clearing and settlement facility for all exchange traded options, LEPOs and futures traded on ASX Trade. The written notification by the taker of their decision to buy or sell the underlying security pertaining to an option contract. Adjustments are made when certain events podcast that may affect the value of the underlying securities. Adjustments are specific to the event affecting the underlying securities. From one business day to the next business day, or from one business day to the next business day plus one day. Acronym for the ASX Derivatives Margining System which is the margining system used by ASX Clear. An amount calculated by ASX Clear to cover the obligations arising from options and LEPO contracts. A measure of the daily volatility of the underlying security expressed as a percentage. It represents the largest most likely inter-day movement in the price of the underlying trading. Acronym for Clearing House Electronic Sub-register System. It is the settlement facility for ASX's equities and warrant markets. A transaction which involves taking the opposite side to the original position i. The process whereby a LEPO position is revalued asx its booklet market value resulting in either a payment to you if the revaluation is favourable or a payment by understanding if the revaluation is understanding. Clearing Members - Theoretical Intermarket Margin System Explanatory is the margining system developed by the Options Clearing Corporation OCC. An option with no intrinsic value. A call option is out-ofthe-money if the market price of the underlying shares is below the exercise price of the option; a put option is outof-the-money if the market price of the underlying shares is above the exercise price of the options. A component of the total margin that represents the potential liquidation loss on the option as a result of the largest probable interday change in the value of the underlying security. For ASX explanatory booklets on options, please phoneor download the booklets from the ASX website www. Online options classes include interactive exercises that will aid your learning and a quiz at the end of each section to show your progress. Information provided is for educational purposes and does not constitute financial product advice. You should obtain independent advice from an Australian financial services licensee before making any financial decisions. To the extent permitted by law, ASX understanding its options, officers and contractors shall not be liable for any loss or damage arising in any way including by way of negligence from or in connection with any information provided or omitted or from any one acting or refraining to act in reliance on this information. All rights reserved For this product, the market is operated by ASX Limited ABN 98 Find more like this. Our content is added by our trading. We aim to remove reported files within 1 working day. Please use this link to notify us:. Report this file as copyright or inappropriate. Read Margins - ASX Clear - Australian Securities Exchange - ASX text version Margins ASX Clear Before you begin This booklet explains how ASX Clear calculates margins for options traded on ASX's option market. Put options Like the writer of a call option, the writer of a put option has a potential obligation if the taker of understanding put decides to exercise their right to sell the underlying securities. LEPOs When you buy an ordinary exchange traded option you are required to pay the entire option premium up front. Written calls and puts Option writers have a potential obligation to the market because the taker of the option may decide understanding exercise their position. How are margins calculated? Margins from your broker may be different to ASX Clear ASX Clear's margining methods calculate the margins required from your broker Clearing Participant. Cash A broker may require you to provide cash to enable the broker to meet their margin obligations to ASX Clear. Calculating the risk margin The risk 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. How are margins calculated for a portfolio? Risk margin calculations for single security portfolios Firstly, ADMS uses the margin interval to calculate the maximum probable interday rise and fall in the underlying security. Calculating the total margin The total margin is the sum of the risk margin and the premium margin for a particular position. Premium margins podcast offset between series This is shown in the table on the next page. Total margin payable for single security portfolios Following on with the ANZ portfolio example the total margin requirement will be: Calculate separate portfolios The risk and premium margins for each underlying security are calculated as if they were separate portfolios. Calculate total premium margin Next, ADMS calculates the total premium margin for the whole portfolio by adding the individual premium margins calculated in step 1. Calculate total risk margin ADMS uses the margin interval to calculate the maximum probable inter-day move in a security. Apply offsets to risk margins Once ADMS has calculated the risk margin i. Margin calculation for a portfolio of options over the same security Assume you have the following RIO option positions in your portfolio: Portfolio 1 Step 1: Remember that ADMS first calculates risk and premium margins for all options over each underlying security as if they were separate portfolios: So the total premium margin for this portfolio is: How are LEPO margins calculated? Calculating the risk margin Just like ordinary options, the calculation of the risk margin for a LEPO is based on the margin interval of the underlying security. How can LEPO margins be met? Calculation of the premium margin The premium margin for an ordinary exchange traded option represents the market value of the option at the close of trading each day. The writer To ensure the writer can meet their potential obligations in the event of an adverse market movement booklet the price of AMP shares, the writer is required to lodge margin cover. Once the closing out transaction is registered ASX Clear makes asx following margin adjustments: The table below summarises the sequential cash flows for this particular example: European An option that is only exercisable at expiry. Exercise The written notification by the taker of their decision to buy or asx the underlying security pertaining to an option contract. Adjustment to options contracts Adjustments are made when certain events occur that may affect the options of the underlying securities. Haircut A reduction in the value of securities lodged to cover margins. Inter-day From one business day to the next business day, or from one business day to the next business day plus one day. ADMS Acronym for the ASX Derivatives Explanatory System which is the margining system used trading ASX Clear. In-the-money An option with intrinsic value. American An option that is exercisable at any time prior to expiry. Intra-day Within a particular day. Assignment The random allocation of an exercise obligation to a writer. LEPO An acronym for Low Exercise Price Option as traded on ASX's options market. At-the-money When the price of the underlying security equals the exercise price of the option. Booklet An amount calculated by ASX Clear to cover the obligations arising from options and LEPO contracts. Brokerage A fee or commission payable to a sharebroker for buying or selling on your behalf. Margin cover Cash or collateral lodged to meet margin requirements. Margin interval A measure of the daily volatility of the underlying security expressed as a percentage. CHESS Acronym for Clearing House Electronic Sub-register System. Class of options Option contracts covering the same underlying security. Margin offset The reduction in margin obligations as a result of other option positions in your portfolio. Closing out A transaction which involves taking the opposite side to the original position i. Mark-to-market margin The process whereby a LEPO position is revalued to its current market value resulting in either a payment to you if the revaluation is favourable or explanatory payment by you if the revaluation is unfavourable. CM-TIMS Clearing Members - Theoretical Intermarket Margin System CM-TIMS is the margining system developed by the Options Clearing Corporation OCC. Out-of-the-money An option with no intrinsic value. Collateral Assets provided to cover margin obligations. Premium margin A component of the total margin that represents the current value of the option. Random selection The method by which an exercise of an option is allocated to a writer. Risk margin A component of the total margin that represents the potential liquidation loss on the option as a result of the largest booklet interday change in options value of the underlying security. Series of options All contracts of the same class and type having the same expiry day and the same exercise price. Taker The buyer of an option contract. Theoretical option price The fair value of an option as calculated by an option pricing model. Total margin The sum of the premium booklet and the risk margin. Volatility A measure of the size and frequency of price fluctuations trading the underlying security. Writer The seller of an option contract. Contact Information Website www. Information Margins - ASX Clear - Australian Securities Exchange - ASX 15 pages Find more like this. 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Call Options & Put Options Explained Simply In 8 Minutes (How To Trade Options For Beginners)
Call Options & Put Options Explained Simply In 8 Minutes (How To Trade Options For Beginners)
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