A call call implies a long position in an underlying and short position in a call outside the money (OTM) in the underlying. What happens if it replaces a futures contract for the underlying in the so -called cover? This week, we discuss when and how to use a futures contract against an OTM call without incurring reinvestment costs.
Shorts
The position consists of a futures contract for almost a month and a short OTM call of about a week. The position involves continuously changing to a short OTM call until its expiration coincides with that of the futures contract. We will refer to this position as a rolling switch trade. Typical switch trade implies the use of futures instead of an underlying. We use the term “roll” in a broad sense to mean changing the short option position from near the week until next week, and not necessarily the same strike.
Suppose you spend a lot of time in the future mills of almost month and short in the so -called NIFTY of the near week (April 9 expiration). When the call close to the week expires, travels the short position next week Nifty Call (April 17). The rolling process will end when it moves the short position at the expiration of April 30, since that coincides with the expiration of the April futures contract. The objective is to capture the decomposition time of the short calls of OTM while continuing to maintain the position of future future. It could still capture a movement almost one by one in the futures contract if the ingenious index will close to the chain.
There are several factors to consider. His point of view on the ingenious index must be bullish; For the premium of the short calls it may not be enough to protect the losses of the position of long futures in case the ingenious index Decline Shaharpy. In addition, you must review the level of resistance to general expenses before shooting your short call position next week. Suppose the NIFTY index is quoted at 21910 and cut the so -called 22300 close to the week. If the NIFTY index will move to 22250 at the expiration of the option, you can choose to change the call 22500 next week. Keep in mind that maintaining the short option until the expiration will help you capture all the decomposition of time as profits, since the time value must become zero in expiration. That said, you can transfer the short position before the expiration if the implicit volatility of next week is significant.
Optional reading
The rolling switch trade is not an alternative to the calling call strategy. To be comparable, you must also constantly transmit your position of long futures. But overturn costs can be high, since the futures curve is usually an ascending inclination, the longer the expiration, the greater the price of the futures. You should consider the rolling switch trade when optimistic in the ingenious index, expects the target price to be achieved closer to the expiration so that it also wins from the decomposition of the time of the option. Therefore, you may not have a reason to carry an exchange of switches every month.
(The author offers training programs for people to manage their personal investments)
Posted on April 12, 2025