Safer Margins for Option Trading: How Accuracy Promotes Efficiency

18 Pages Posted: 25 Jun 2015

See all articles by Rafi (Rafael) Eldor

Rafi (Rafael) Eldor

Interdisciplinary Center (IDC) Herzliya - Arison School of Business

Shmuel Hauser

ONO Academic Collge; Guilford Glazer Faculty of Business and Management

Uzi Yaari

Rutgers University; School of Business-Camden

Multiple version iconThere are 2 versions of this paper

Date Written: 2011

Abstract

Margin requirements are designed to control the default risk inherent to commitments undertaken by traders writing options. Much like similar institutions, the Tel Aviv Stock Exchange 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 Exchange switched in 2001 to a more detailed margin system based on the most pessimistic of 44 scenarios. This unique change provides 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, this study demonstrates that the more accurate pricing of default risk over the studied range increases efficiency by a number of measures, including a smaller implied standard deviation and deviations from put-call parity.

Keywords: option margins; option default risk; market efficiency; SPAN system

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 (2011). Multinational Finance Journal, Vol. 15, No. 3/4, p. 217-234, 2011, Available at SSRN: https://ssrn.com/abstract=2622925

Rafi (Rafael) Eldor (Contact Author)

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

ONO Academic Collge ( email )

Tzahal Street 104
Kiryat Ono, 55000
Israel

Guilford Glazer Faculty of Business and Management ( email )

Israel

Uzi Yaari

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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