For investors who sometimes trade short options or trade in futures, the term 'margin' is probably a familiar concept. At Saxo Bank we also offer margin, but in a slightly different way than you are used to at BinckBank.
Saxo Bank has two different methods of margin calculation. The standard method is the Strategy Based Margin method (SBM), where you can determine what the margin will be using relatively simple formulas. The other available option is Portfolio Based Margin (PBM). PBM is based on scenario analyses/stress tests in which the most negative scenario determines the margin. This cannot be calculated externally using a formula. In general, PBM leads to a lower margin requirement, however, please note that the deficit procedure is stricter. For margin use in general, it is advisable to maintain a large buffer.
This article explains how Saxo Bank handles Strategy Based Margin in practice.
Differences in margin calculation between Saxo Bank and BinckBank
The margin calculation that Saxo Bank uses differs only slightly from BinckBank. The impact will therefore be minimal in most cases, for example for At The Money (ATM) options – options with a strike price at or close to the current price.
For options that are In The Money (ITM), the margin calculation will in many cases be more favourable and result in a lower margin requirement. The opposite is true for the (far) Out of The Money (OTM) put options. This is because there is a minimum margin at Saxo Bank. This minimum is based on a percentage of the strike price. For the same reason, for example, a further rise in the share price will no longer lead to a reduction in the margin for the short put option
Underlying risk rating
Furthermore, at Saxo Bank, the risk classification of an underlying asset (usually a share) also affects the margin requirement amount. The higher the estimated risk is, the higher the required margin. At Saxo Bank, underlying assets are therefore classified according to a risk rating. The risk rating partly depends on the country in which the company concerned is located, the sector in which it operates, the volatility and the daily average volume. The rating runs from 1 to 6, with 1 being the best rating (the least risky).
Parameters
This risk rating is important because it determines two parameters that are used in the margin calculation. These are the X and Y percentages in the formula below.
In short: for underlying assets with a good rating, there is a good chance that the required margin will be lower according to the Saxo Bank methodology. For underlying values with a poorer rating, it is likely that the required margin will increase.
Some examples of stocks and their rating (subject to change):
- AGN / Microsoft / IBM
- ASML / Philips / ABN
- ASMI / BEST / Total / Tesla / Aalberts
- BAM / Heymans / Alfen / SIF
- Novavax / The Macerik / First Majestic Silver Corp / 3D System corp / Vaxart
- Ordina / Brunel
The impact on the margin formula for short puts
After reading the risk rating information, you may have some idea of how Saxo Bank calculates the required margin for options and futures. If you would like to know more about how margin for uncovered short put options is calculated, you can see the margin formula for (uncovered) short puts below:
Margin = the price of the put + (the highest value of ((X%* S) - OTM value put) or (Y% * K))
At which:
S = price of the underlying asset
K = the strike price
OTM Value Put = EV – the strike price. (If this value is negative, 0 is chosen).
X and Y = parameters from the Saxo risk system that differ per rating
Rating |
X |
Y |
1 |
15% |
8% |
2 |
20% |
12% |
3 |
25% |
15% |
4 |
35% |
25% |
5 |
60% |
40% |
6 |
100% |
100% |
Example of margin calculation method for a rating of 1:
- Underlying value = €100
- Strike price of the short put = €80
- Duration = 6 months
- Put price = €2.25
- X = 15%
- Y = 8%
Margin = €2.25 + ((15% of EV price) – (EV price – strike price)) or (8% of strike price)
Margin = €2.25 + ((€15) – (price EV – strike price)) or 8% of the strike price
Margin = €2.25 + ((€15) – (€20)) or 8% of the strike price
In this case, the price of the EV is $100 and the strike price is $80. So the price minus the strike price is $20. If we take the first part of the formula — which came out at 15 — and subtract 20 from that, it would yield a negative number. So, zero is chosen. The consequence of this is that the second part of the formula is chosen here, which is 8% of the strike price.
Margin = €2.25 + €6.40 = €8.65 * 100 (contract size option) = €865
But what does it look like with a rating of 5?
Example of margin calculation method for a rating of 5:
- Underlying value = €100
- Strike price of the short put = €80
- Duration = 6 months
- Put price = €2.25
- X = 60%
- Y = 40%
Margin = €2.25 + ((60% of EV price) – (EV price – strike price)) or (40% of strike price)
Margin = €2.25 + ((€60) – (price EV – strike price) or 40% of the strike price
Margin = €2.25 + (€60 – €20) or 40% of the strike price (= €32)
Margin = €2.25 + €40 or €32
Margin = €2.25 + €40 = €42.25 * 100 (contract size option) = €4,425
You can now see that the margin is higher than with a risk rating of 1. Because the underlying asset is seen as a higher risk, higher percentages for the X and Y are used in the margin formula.
The margin formula for call options
The margin formula for uncovered calls:
Margin = the price of the call + (the highest value of: ((X%* S) - OTM value call) or (Y% * S))
at which:
- S = price of the underlying asset
- K = the strike price
- OTM Value Call = strike price - EV. (If this value is negative, 0 is chosen).
- X and Y = parameters from the Saxo risk system that differs per rating.
Example of margin calculation method for a rating of 1 of an uncovered short OTM call:
- Underlying value = €100
- Strike price of the short call = €110
- Duration 6 months
- Call price = €2.25
- X = 15%
- Y = 8%
Margin = the price of the call + (the highest value of: ((X%* S) - OTM value call) or (Y% * S))
Margin = $2.25 + ((15% of $100) – 10) or (8% of 100))
Margin = €2.25 + ((5) or (8))
Margin = €2.25 + €8 = €10.25 (contract size option)
Margin = €2.25 + €8 = €10.25 * 100 (contract size option) = €1,025
Example of margin calculation method for rating of 1 of an uncovered short ITM call:
- Underlying value = €100
- Strike price of the short call = €90
- Duration = 6 months
- Call price = €12.25
- X = 15%
- Y = 8%
Margin = the price of the call + (the highest value of: ((X%* S) - OTM value call) or (Y% * S))
Margin = $12.25 + ((15% of $100) – 0) or (8% of 100))
Margin = €12.25 + ((15) or (8))
Margin = €12.25 + 15 = €27.25 * 100 (contract size option) = €2.725
The margin is therefore €2,725 per uncovered short call. Note that the higher of the two possible outcomes of the formula (15 or 8) is chosen. In this case, the required margin is therefore €12.25 + €15 = €27.25.
Cover short call options
If your end-customer owns shares, you can sell short calls on the shares your end-customer has in their portfolio. This is called covered writing. Normally you can sell short 1 call per 100 shares, without the required margin. This is because you can always meet your end-customer's (potential) delivery obligation since your end-customer already owns the shares.
Saxo Bank supports this in principle, but at the same time stipulates that as an option seller your end-customer must always be able to buy back the short option. This means that the option premium received is not 'free to spend'. The current option premium (currently required to redeem the option) is reserved to ensure that you can buy back the short option at any time. You can therefore no longer use the option premium received to purchase other securities, for example.
Margin utilisation (also called margin consumption)
Saxo Bank uses two different types of margin when entering into futures positions. The first type of margin is the one needed to enter into a position; this is the initial margin. Once the position has been taken, the maintenance margin obligation arises. This maintenance margin is used to determine margin utilization.
With options, no distinction is made between initial and maintenance margin. For options only 'margin' applies. The (maintenance) margin is expressed as a percentage of the assets. As soon as this exceeds 100%, you end up in the deficit procedure. It is therefore important that you keep a close eye on your end-customer's margin utilization.
It is advisable to take immediate action when your end-customer's account is in deficit to avoid having positions liquidated. You can do that by reducing the number of positions that require margin, closing positions or making a cash deposit.
Below is an example of margin usage:
Assets | 109,800 | |
Maintenance margin | 13,000 | |
Margin utilization | 11.84% | ((13,000/109,800) * 100%) |
Conclusion
There are some differences between BinckBank and Saxo Bank regarding the calculation of margin. In practice, however, most investors will hardly notice the change. Investors who short put options should be aware that a percentage of the strike price now applies as the minimum margin. Investors who sell short calls on their own shares should take into account that the (current) option premium is reserved.