Safer Margins for Option Trading: How Accuracy Promotes Efficiency

18 Pages Posted: 9 Apr 2008 Last revised: 11 Oct 2013

See all articles by Rafi (Rafael) Eldor

Rafi (Rafael) Eldor

Interdisciplinary Center (IDC) Herzliya - Arison School of Business

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management; Government of the State of Israel - Israel Securities Authority

Uzi Yaari

Rutgers University; School of Business-Camden

Multiple version iconThere are 2 versions of this paper

Date Written: May 20, 2009

Abstract

Margin requirements are designed to control the default risk inherent to commitments undertaken by option traders. Much like similar institutions, the Tel Aviv Stock Exchange (TASE) first adopted a system based on the Standard Portfolio Analysis of Risk (SPAN), which sets required levels of options margin according to the most pessimistic of 16 possible outcomes. Seeking to lower the probability of default without adversely affecting liquidity, the TASE switched in 2001 to a more detailed margin system based on the most pessimistic of 44 scenarios. This change provides us with an ideal laboratory for testing the impact of increased margining precision on the efficiency of option trading. Based on a sample of over 3 million transactions, we conclude that the more accurate pricing of default risk over the studied range leads to smaller implied standard deviation and deviation from put-call parity.

Keywords: derivative margins, option margins, SPAN system, option leverage, option default risk, market efficiency

JEL Classification: G11, G13, G14, G20

Suggested Citation

Eldor, Rafi (Rafael) and Hauser, Shmuel and Yaari, Uzi, Safer Margins for Option Trading: How Accuracy Promotes Efficiency (May 20, 2009). Journal of Multinational Financial Management, Vol. 15, No. 3/4, 2011, Available at SSRN: https://ssrn.com/abstract=1118039 or http://dx.doi.org/10.2139/ssrn.1118039

Rafi (Rafael) Eldor

Interdisciplinary Center (IDC) Herzliya - Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel
972-9-952-7234 (Phone)
972-9-956-3616 (Fax)

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management ( email )

P.O. Box 653
Beer-Sheva 84105
Israel
+972 2 651 3939 (Phone)
+972 7 6472896 (Fax)

Government of the State of Israel - Israel Securities Authority

22 Kanfei Nesharim Street
Jerusalem 95464
Israel

Uzi Yaari (Contact Author)

Rutgers University ( email )

School of Business
Camden, NJ 08102
United States
610-664-2086 (Phone)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

School of Business-Camden ( email )

Rutgers University
227 Penn Street
Camden, NJ 08102
United States
610-664-2086 (Phone)
610-664-2198 (Fax)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

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