Calculating a futures trade

Venkatesh Bangaruswamy | Updated on May 30, 2021

A couple of readers (K. Vijay and M. Radhakrishnan) pointed a calculation error in the article published under the Mastering Derivatives column last week.

The article discussed how to adjust a loss-making short futures position when a trader has a view that an underlying will decline following a price increase.

The calculation error relates to a scenario when the underlying trades at 14955 at contract expiry for an adjusted position consisting of short futures at 14955 and long one contract of 15100 put and short two contracts of 15000 put. The adjusted position will carry a total gain of 87 points, not a 13-point loss stated in the article.

The calculation is as follows: One of the 15000 strike short put will carry a 45-point loss, the difference between the strike price and the spot price (15000 less 14955). The 15100 long put will carry a 100-point gain (15100 less 15000).

The loss on the other 15000 strike short put will be offset by the gain on the 15100 strike long put for the underlying below 15000. There will be no-gain no-loss on the short futures position, as the futures price at initiation is equal to the spot price at expiry. Add to this the 32-point credit on the spread and the total gain is 87 points (-45+100+32).

The original calculation inadvertently failed to add the 100-point gain on the 15100 put. The error is deeply regretted. We thank the readers for pointing out the error.

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Published on May 30, 2021

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