For Portfolio Margin, PowerTrade uses the SPAN Margin method, there are some choices to be made in terms of methodology and parameters when bumping implied volatility. These choices impact the scenarios which are considered in order to assess the health risk and hence liquidation of a client's portfolio.
The current implementation considers the scenario where:
Unchanged Implied Vol and underlying.
Underlying is shocked up and down by 15%
Implied Vol is shocked up and down by a quantity proportional to the expiry of the option (days to expiry - DTE):
Max_IV_bump = 40% x ((30 / DTE) ^ 0.30)
Methodology and Parameters for IV shock
For the Implied Vol shocks at present the additive methodology is being employed:
- IV_up = IV + MAX_IV_bump
- IV_down = IV - MAX_IV_bump (floored at zero).
IV Shock Parameters
Clearly an important choice is what parameter to use when bumping vol (highlighted in orange). Currently, a 40% parameter is employed:
- Max_IV_bump = 40% x ((30 / DTE) ^ 0.30)
Portfolio Netting for SPAN
Combining all these market moves leads to 9 scenarios as follows:
*Orange cell = the worst case
For a given underlying, say BTC, the scenarios are then applied for each position. By aggregating the results per scenario of all the positions leads to the total scenario value of the portfolio. Assuming highlighted in orange is the representative worst loss scenario of the portfolio, this number is the one then used in the calculation of margin requirement.
There are currently no extra requirements for Initial Margin nor Contingency adjustments.
The max loss for all scenarios becomes the Margin Requirement which determines your Account Health and Liquidation scenarios. For more information, please refer to this article.