How Does the Exchange Calculate the Risk-Based Margin for a Naked Option?

Exchanges calculate the risk-based margin for a naked (uncovered) option using complex formulas that assess the maximum potential loss under extreme market conditions. This calculation typically involves stress-testing the portfolio against various scenarios, considering factors like implied volatility, the option's moneyness, and the underlying asset's historical volatility.

The goal is to set a margin requirement high enough to ensure the writer can cover their potentially unlimited loss obligation, thus protecting the exchange and the counterparty.