Much to the advantage of the investors using calendar spread as a tool to hedge their investments, the capital market regulator, Securities and Exchange Board of India (Sebi), on Friday decided to extend calendar spread treatment till expiry of the near-month contract.
A calendar spread is a derivatives strategy, where an investor takes a long and a short position in the same underlying but in two different delivery months.
Viral Mehta, director, F&O, Mehta Securities, said, “With a calendar spread, the trader is expecting the stock to remain in a narrow range, the trade is actually a play on time-decay and volatility and gain from the arbitrage difference.”
Earlier, a calendar spread was treated as a naked position in the far-month contract three trading days prior to the expiry of the near month contract. However, with the removal of calendar spread treatment three trading days prior to the expiry of the near-month contract leads to a sudden increase in margins without any corresponding increase in the risk of the spread position.
It has, therefore, been decided that henceforth a calendar spread position on exchange-traded equity derivatives may be granted calendar spread treatment till the expiry of the near month contract.