Volatility Scan Range

SPAN margins a portfolio by imagining bad days. It moves the underlying price up and down across a scanning range, and — because an option is worth more when the market is jumpy — it also moves volatility up and down. The volatility scan range is the size of that second move.

Why floor it? Because volatility is estimated from the recent past, and the recent past is at its calmest just before it stops being calm. An exchange that let SPAN take a fortnight of quiet trading at face value would be collecting its smallest margins precisely when the next shock was closest.

So SEBI sets a minimum. Below that number the model is not allowed to go, however peaceful the market looks.

Two parameters drive SPAN: the initial margin rate, called the scanning range, and the percentage volatility movement — the VSR. SEBI prescribes the minimum level of the second, effective 1 April 2021, and it is used for Short Option Minimum Margin.

The matrix has two dimensions, commodity type and volatility bucket:

Agricultural floors sit one percentage point above non-agricultural floors at every level. That is deliberate: agricultural spot markets are outside the exchange, carry no Daily Price Limit, and are exposed to monsoon, harvest and policy shocks that metals are not.

VSR has a second job beyond margining. For options contracts, the Daily Price Limit is based on the volatility scan range — so the same parameter that sets how much margin a writer posts also sets how far the option premium is allowed to travel in a session.

Do not confuse VSR with VaR, which the workbook defines as the maximum level of volatility expected 99% of the time over the Margin Period of Risk, and which drives initial margin on futures.

Two option writers, same day, same exchange.

Writer A sells a silver option. Silver is non-agricultural, and its annualised realised volatility is running at 22% — the high bucket. Minimum VSR: 6%.

Writer B sells a guar seed option. Guar seed is agricultural, and its annualised realised volatility is running at 12% — the low bucket. Minimum VSR: 5%.

Notice the result: the calm agricultural commodity carries a higher volatility floor (5%) than a non-agricultural commodity in the same low bucket would (4%), and only one point below the violently volatile silver.

Now size it. Writer A is short one silver option on the standard lot of 30 kilograms, with silver at Rs 70,000 per kilogram:

Notional value of the lot = 30 x 70,000 = Rs 21,00,000

If the exchange's own volatility estimate for silver had come in at 4.5%, SPAN would have been run at that number. SEBI's floor forces 6% instead. On a Rs 21,00,000 notional, that extra 1.5 percentage points of scanned volatility is roughly Rs 31,500 of additional worst-case option value that SPAN must now cover — margin the writer has to fund before he is allowed to keep the position open.

Chapter 7 (Clearing, Settlement and Risk Management), sections 7.11.1 and 7.12.2, and Chapter 7 section 7.10.5 for the link to option Daily Price Limits. The matrix is asked numerically: expect "the minimum volatility scan range for agri commodity derivatives is ____" and questions on which bucket a given annualised volatility falls into.

• Agri 5/6/7, non-agri 4/5/6. Agricultural floors are one point higher at every level, not lower.
• The buckets are 0-15%, 15-20% and 20%-plus annualised. A commodity at 20% sits in the high bucket.
• VSR is not VaR. VaR is the 99% confidence loss over the Margin Period of Risk and drives initial margin; VSR is a SPAN input and drives SOMM.
• VSR is a minimum, not the figure actually used. An exchange may scan a wider band; it may not scan a narrower one.
• For options, DPL is based on the volatility scan range, not on a flat percentage of the previous close the way futures circuit filters are.
• VSR applies to option writers. Option buyers post no margin, so no scan range touches them.