A calendar spread is a trading strategy that helps a trader hedge against price volatility in a particular commodity. Here, the trader takes position of two or more contracts on the same underlying asset but with different delivery or expiry dates. The strategy can be applied to both futures and options contract in equity as well as commodities derivative segment.
In commodities trading, a trader has to pay initial margin for each position taken, be it futures or option contracts. But the market regulator SEBI has given margin benefit on calendar spread in commodities futures contracts, where 75 per cent of initial margin is permitted to be offset. For instance, if you have taken a position in gold futures (long) (September contract), say 1 lot and you have also taken an equivalent short position in gold in a different expiry (say October contract), then this calendar spread benefit applies. Suppose if you margin works out to ₹1 lakh, then your margin obligation for the combined position comes down to ₹25,000.
At present, in case of calendar spreads or spreads consisting of two contracts having the same underlying commodity, initial margin benefits shall be permitted only when each individual contract in the spread is from amongst the first three expiring contracts. Recently, in August this year, SEBI has extended this benefit to six expiring contracts. The circular shall be effective within one month from the date of its issue (August 9, 2021). The calendar spread margin not only helps in minimising losses, but also helps in improving liquidity in far-month contracts, facilitating hedging and reducing the cost of trading.
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