Picture this. You have a positive outlook on an underlying. The price has just broken above the resistance level, and you are convinced that this is not a false breakout. You have also identified an overhead resistance level not far from the breakout level. What is the optimal strategy to set up? This week, we discuss switch time ratio spread and why it is beneficial compared to a call ratio spread for such setups.
Time value
A call ratio spread involves going long one contract of a lower strike call and short two contracts of a higher strike call. A variation to this strategy involves two different short strikes. The short calls must be at least one strike above the resistance level. This is to increase the likelihood that the short calls expire worthless.
A switch trade involves a long futures contract instead of a long call, with the short leg having the same two strikes as the ratio call spread. A switch time ratio spread involves long one contract of the near-month futures contract and short two contracts of different expiry; in this case the near-week out-of-the-money (OTM) strike on the same underlying. This means the trade can be set up only on the Nifty Index, as weekly options are currently available only on that index.
The motivation behind the setup is that futures contracts do not suffer from time decay as options do. So, futures can capture a near one-to-one movement in the underlying, even if that movement is small but steady. In contrast, options could gather losses if time decay (theta) is more than delta gains. That is, the loss in time value is more than the gain in the option price because of the small but steady upmove in the underlying. But why near-week options? The reason is that time decay of the near-week option will be faster than the near-month option. The trade-off is the near-week option will have lower time value than the near-month option. So, the time decay gains will be lower. For instance, the near-week 26400 call option last traded at 42 points whereas the near-month 26400 last traded at 234 points. You must close the switch time spread just before expiry of the near-week option. Also, you must close the short options leg first to avail the cross-margin benefit.
Optional reading
One short option is covered by the long futures contract. The other option is a naked short position. So, you should be mindful of the underlying price moving up sharply. Also, the position is exposed to downside risk, as futures contract has a symmetrical payoff. In the event of the underlying moving down, you can close your futures position and keep both short calls open to capture time decay gains. Alternatively, you can close the spread position and reduce your losses, if any. Note that the setup requires large capital because of margin requirements on both the futures and the call positions.
(The author offers training programmes for individuals to manage their personal investments)
Published on November 29, 2025
