In Options Trading, How Does Netting Affect the Calculation of Initial Margin?
Netting allows traders to offset the risk of various options positions within a portfolio, reducing the overall exposure. For instance, a long call option and a short call option on the same underlying asset can be netted to reduce the overall risk calculation.
This results in a lower initial margin requirement compared to calculating the margin for each position in isolation. The netting process recognizes the correlation and hedging effect between positions.
Glossar
Netting
Calculation ⎊ This is the mathematical process of offsetting mutual obligations between two counterparties across a portfolio of derivative contracts to determine a single net liability or asset position.
Long Call Option
Premium ⎊ A long call option represents a contract granting the buyer the right, but not the obligation, to purchase an underlying cryptocurrency asset at a predetermined price, the strike price, on or before a specified expiration date.
Netting Process
Mitigation ⎊ Netting processes, within cryptocurrency, options trading, and financial derivatives, represent a risk reduction technique applied to counterparty credit exposure.
Margin Netting
Collateralization ⎊ Margin netting, within cryptocurrency derivatives and options trading, represents a risk mitigation technique where multiple trades with the same counterparty are consolidated into a single net exposure, reducing the overall margin requirement.
Short Call Option
Premium ⎊ A short call option represents an obligation assumed by the seller to potentially deliver an underlying cryptocurrency asset at a predetermined strike price, receiving a premium as immediate compensation for this commitment.