How Are Initial Margin Requirements Calculated for Options and Derivatives?

Initial margin for options and derivatives is typically calculated using sophisticated risk models like SPAN (Standard Portfolio Analysis of Risk) or VaR (Value at Risk). These models simulate thousands of potential market scenarios, including changes in price and volatility, to estimate the potential loss a portfolio could suffer over a specific time horizon (e.g. two days).

The initial margin is then set at a level high enough to cover this estimated potential loss to a high degree of confidence, such as 99% or 99.5%.