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.
Glossar
Extreme Market Conditions
Volatility ⎊ Extreme market conditions in cryptocurrency, options, and derivatives manifest as amplified volatility clusters, exceeding historical norms and challenging standard risk parameterization.
Maximum Potential Loss
Exposure ⎊ Maximum Potential Loss (MPL) within cryptocurrency, options trading, and financial derivatives represents the theoretical worst-case financial detriment an investor could incur from a specific position or portfolio.
Naked Put Option
Position ⎊ A naked put option position involves selling a put option without holding a corresponding short position in the underlying asset.