Previously in this column, we discuss the tread switch trade. To recapitulate, this trade implies a long position in the futures contract for almost a month and a short position in an almost money purchase option (OTM) in the NIFTY index. The position involves shooting the short purchase option until its expiration coincides with that of the ingenious futures contract. This week, we discuss when to establish the position and the capital application for the trade.
Commercial characteristics
You must determine the possible reward in your commercial capital before starting a shooting switch trade. To determine commercial capital, it is important to understand that the position will attract margin requirements. The futures contract, regardless of or the long or short position, is an obligation. Therefore, his corridor will collect the initial margins and Mark-To Market in the position. Short option positions are an obligation. Therefore, you will be asked to pay margin in the so -called OTM shorts as well. But you can get a benefit from the cross margin, although both long and short calls are bondigatory positions. This is because a naked short call exposes it to the high risk, but a short call against a long future position controls the risk.
If you start a long position in the futures of April, your initial margin requirement will be approximately 1.94 Lakh. A short naked position in the call of 23000 Nifty close to the week will require a margin of approximately 1.85 Lakh. But a combined position in a rolling switch trade will require approximately a margin or 2.46 Lakh, a cross -margin benefit or 1.3 Lakh. Keep in mind that your main risk in rolling switch trade comes from a decrease in the NIFTY index. Therefore, you must maintain a tight stop level in the price of futures to administer the risk; The premium collected in the so -called short OTM may not be enough to cover the losses in futures in case the ingenious index is submerged.
It is optimal to configure the position when your view on the ingenious index is positive, but expects the volatility to implude. This means that he expects the ingenious index to increase gradually and the implicit volatility to decrease. This is important for two reasons. One, its point of view on the index allows you to gain the close movement to one in the position of future mills, even if the objective price is achieved closer to the chain. And two, implicating volatility allows you to benefit from the decomposition of time in the so -called short OTM. Keep in mind that implicit volatility is a component of the time value of an option that decomposes zero at maturity; A decrease in implicit volatility will accelerate decomposition time.
Optional reading
The objective of shortening the OTM call of the near week is to quickly capture the decomposition of time, but the absolute time value will be low. Alternatively, OTM Call could be cut next week, which will have a high time value. But the option will have time to become the money (ITM), which could work against its commercial position.
(The author offers training programs for people to manage their personal investments)
Posted on April 19, 2025