What are the special difficulties of margining options?
For options series that have a strike price that is far away from the current spot price, the options market is often quite illiquid. For these options series, mark to market margins (which are charged to the option short) is hard to calculate either because the illiquidity of the options market makes the market’s option price less reliable, or because the market fails to trade the option at all on a given date. In such a situation, theoretical models are used to impute the fair price of the option, and mark-to-market is done using this notional price. The initial margin calculation is always concerned with calcualating the largest loss which a position can suffer. This becomes quite complex when options are a part of the portfolio, given the nonlinear payoffs of options.
