I am exploring following strategy using Future Calendar Spread. This trade will have two legs
- Short current month Future contract
- Long next month Future contract
Objective is to collection premium from current month Future contract with the assumption next month Future contract will not loose as much premium as much as current month, and current month Future contract will loose all premium and converge to spot price for a fact.
Kotak Mahindra bank , Lot size - 800
Spot - 1255.70
Feb Fut - 1263
Mar Fut - 1266
If I Sell Feb contract and Buy Mar contract Feb contract will loose all premium about Rs. 7 * 800 = 5600. As long as spread value does not change more than 7 this trade will be profitable and I will close the trade on Feb month expiry closing both legs of trade.
This strategy does not intend to attempt arbitrage just to collect premium. If this trade goes at its best it will require about 33000 as margin and will result in a profit of about 5600.
What are the pitfalls or problems you can find with this strategy, where it can result in loss? or do you have any suggestions to improve this strategy?