Eating Forward Difference

O

OptionQuant

Active Member
#1
#1
Dear All,

I have a query. As you know, the Forward for any script in Near month is greater than forward for current month. (Interest Cost). Suppose I want to eat the interest cost. My strategy is as follows -

At the beginning of current month,

buy call ATM, current month
sell put ATM, current month
sell forward, near month


Just before expiry of current month, unwind the position. Will this give me the difference in forward?

I think yes, my friend says No.

Please resolve it for us
 
M

mastermind007

Well-Known Member
#2
#2
OptionQuant said:
Dear All,

I have a query. As you know, the Forward for any script in Near month is greater than forward for current month. (Interest Cost). Suppose I want to eat the interest cost. My strategy is as follows -

At the beginning of current month,

buy call ATM, current month
sell put ATM, current month
sell forward, near month


Just before expiry of current month, unwind the position. Will this give me the difference in forward?

I think yes, my friend says No.

Please resolve it for us
Click to expand...
This is might fine and very interesting but just so you know, Indian exchanges run CE/PE options and therefore when you trade options, your contractual obligation is confined by your trade contract and not by the Options Contract, per se!!

If you still want to go ahead and eat options, all I can say is

Melody Khao, Khud Jaan Jao

:thumb::thumb:
 
H

heppagudi

New Member
#3
#3
Decide which direction market moves, buy least number of call or put lots and wait for the expiry so that forward premium eating happens with the least lots and buy the remaining lots with the remaining networth amount while mirroring or hedging calls and puts and enjoy the correction..
 
T

trader_ks

Active Member
#4
#4
If market doesn't move, your current month premium will erode during expiry while next month premium will have time premium left and you will be in big loss. So better do backtesting or check feasibility using some tools like option oracle.
 
O

OptionQuant

Active Member
#5
#5
heppagudi said:
Decide which direction market moves, buy least number of call or put lots and wait for the expiry so that forward premium eating happens with the least lots and buy the remaining lots with the remaining networth amount while mirroring or hedging calls and puts and enjoy the correction..
Click to expand...
I do not understand. Can you explain in detail?
 
Subhadip

Subhadip

Well-Known Member
#8
#8
OptionQuant said:
Dear All,

I have a query. As you know, the Forward for any script in Near month is greater than forward for current month. (Interest Cost). Suppose I want to eat the interest cost. My strategy is as follows -

At the beginning of current month,

buy call ATM, current month
sell put ATM, current month
sell forward, near month


Just before expiry of current month, unwind the position. Will this give me the difference in forward?

I think yes, my friend says No.

Please resolve it for us
Click to expand...
OptionQuant said:
My mistake. I meant futures
Click to expand...
Buying ATM CE and selling ATM PE is synthetic future buying.
Also when you sell next month future contract.

Difference will be very minimal at the time of expiry.

You can see and tell exact price then you will know ur self.

It is direction neutral. So u will never be in loss or profit due to any kind of movement.
 
V

varunkochhar

Banned
#9
#9
what you have done is funded your call option by selling the put option which would be about the same value. And even if the market goes down, whatever you lose in the put would be more than compensated by the shorted future.
 
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