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CM Strategy

No more margin tension for the calendar spreaders

SEBI has released a notification that calendar spreads (buying one month’s future and selling another) would no longer require margin towards the end of one of the contracts.

The rule earlier was that when there were less than three days to a contract’s expiry, margins of calendar spreads would not cancel each other out. So, if you had bought an August future for say Rs. 100, and sold the September future for Rs. 110, the margins would usually offset each other (since your risk is much more than the difference between the two contract prices). But till now, for the last three days before August expiry, your broker would demand double margin – one for each contract because the margins weren’t allowed to offset each other.

This wasn’t very good for arbitrage strategies, where tiny discrepancies are taken out and to give a good return, leverage is necessary. With this clarification that bit is solved.

Calendar spreads may involve options too – and it is here where the unwinding hurts the most. Double margins are unnecessary especially when you have a reasonable liquidity in both (offsetting) contracts. On the other hand, it promotes a lot of leveraged positions where suddenly on the day after expiry, a trader may find himself needing to put up a huge amount as margin (as the offsetting position expired). We assume that calendar spreads are only taken by people who know what they are doing; but it often turns out that they don’t, even if they are large, experienced investment banks.

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