Hi,
I am executing a long futures contract of near month and it’s started to fall.
My question is, Shall I short next month contract and create a spread and reduce the losses.
Will all the brokerage firm accept this kind of spread.
Yes, you can short the next month future contract and create a hedge for your long future position but this will not reduce your losses. It will only prevent you from having further losses. There is a possibility that you could make a slight profit on the spread position if there is an arbitrage opportunity where the difference between the price of the 2 futures contracts is high and this difference reduces. Then you make a profit on the spread and this will slightly reduce your losses as you are already in a loss. But otherwise, the spread will ensure you dont make further losses if the market falls, but if the market goes up, then the spread will also prevent you from making a profit.
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Thankyou sir. Another query, will margin benefit will be applicable when we execute like this.
Yes, you certainly get a margin benefit while taking a calendar spread position. In the screenshot below, you can see that 2 Nifty future positions require a margin of 1.25 lacs but since it’s a spread position, only a margin of 16k is used up.
Important note: You require to have the 1.25 lacs in your account while taking both the positions. Once both the positions are executed, then only 16k margin is blocked and the other 1.08 lacs is released back into your account.
Since you already have a long future position, you require to have another 63k to take a short future position of the next month, and once the position is taken, only 16k will be blocked and the other 1.08 lacs will be released back into your account as free cash with which you can take other positions.
You can verify this yourself using the span margin calculator.
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