The Nifty Futures have a unique niche in the Indian derivatives market. The most extensively traded futures instrument is the ‘Nifty Futures,’ making it the most liquid contract in the Indian derivative markets. Nifty Futures is clearly one of the top 10 index futures contracts traded in the world, which may surprise you. I’m sure that once you’re familiar with futures trading, like many of us, you’ll be actively trading the Nifty Futures. As a result, it would be prudent to gain a full understanding of Nifty futures. But, before we go any farther, I’d like you to refresh your memory on the Index, which we reviewed previously.
I’m going to presume you have a decent comprehension of the index, therefore I’ll go on to discussing Index Futures or Nifty Futures.
The futures instrument, as we all know, is a derivative contract whose value is derived from an underlying asset. The underlying in the case of Nifty futures is the Index itself. As a result, the value of the Nifty Futures is derived from the Nifty Index. This means that if the Nifty Index rises in value, so will the value of Nifty futures. Similarly, if the value of the Nifty Index falls, so do the Index futures.
Nifty Futures, like any other futures contract, comes in three flavors: current month, mid-month, and far month. For your convenience, I’ve highlighted the same in red. I’ve also highlighted the Nifty Futures price, which was Rs. 11,484.9 per unit of Nifty at the time of this snapshot. The underlying value (spot value of the index) was Rs. 11,470.70. Of fact, because of the futures pricing mechanism, there is a discrepancy between the spot and futures prices. In the following chapter, we’ll learn about futures pricing concepts.
The margin requirements for trading Nifty Futures are as follows: To calculate the margins, I utilized the Zerodha Margin Calculator
These details should provide you with a basic understanding of Nifty Futures. The liquidity of Nifty Futures is one of the primary qualities that makes it so popular. Let us now look at what liquidity is and how it is measured.
What is the needed margin to purchase Nifty futures?
The Nifty Index is a basket of 50 equities, as you may know. These stocks were chosen to reflect a broad range of India’s economic sectors. As a result, Nifty is a good indicator of India’s overall economic activity. This indicates that if overall economic activity is increasing or expected to increase, Nifty’s value will increase as well, and vice versa. Trading Nifty Futures is also a better option than trading single stock futures because of this. There are numerous causes for this, including the following:
- It is diversified Taking a directional judgment on a single stock might be difficult at times, primarily due to risk considerations. Let’s imagine I decide to invest in Infosys Limited in the hopes of seeing positive quarterly results. If the findings fail to impress the markets, the stock, as well as my profit and loss, will suffer. Nifty futures, on the other hand, has a 50-stock portfolio that is well-diversified. The Index’s movement is not entirely dependent on a single stock because it is a portfolio of stocks. Of course, a few stocks (index heavyweights) can have an impact on Nifty from time to time, but not on a daily basis. To put it another way, when you trade Nifty futures, you eliminate all ‘unsystematic risk’ and just deal with’systematic risk.’ I understand that these are new terminology for you; we’ll go over them in further depth when we talk about hedging.
- Hard to manipulate – The Nifty movement is a reaction to the collective movement of India’s top 50 companies (by market capitalization). As a result, manipulating the Nifty index is practically impossible. Individual stocks, on the other hand, are a different story (remember Satyam, DHCL, Bhushan Steel etc)
- Liquidity (easier fills, minimal slippage) We talked about liquidity previously in the chapter. Because the Nifty is so liquid, you can literally trade any amount of it without fear of incurring a loss due to impact costs. Furthermore, there is so much liquidity that you can transact as many contracts as you like.
- Margin requirements are substantially lower for Nifty futures than for individual stock futures. To put things in context, Nifty’s margin requirement is from 12 to 15%, but individual stock margins might be as high as 45-60%.
- Trading the Nifty futures necessitates the use of a broad-based economic call rather than company-specific directional recommendations. Performing the former is considerably easier than the latter, in my opinion.
- Technical Analysis – Technical Analysis is most effective on liquid instruments. Because liquid equities are difficult to manipulate, they often move in accordance with market demand-supply dynamics, which is what a TA is primarily focused on.
- Less volatile When compared to individual stock futures, Nifty futures are less volatile. To put things in perspective, Nifty futures have an annualized volatility of roughly 16-17 percent, whereas individual equities, such as Infosys, have an annualized volatility of up to 30 percent.
Is it possible to buy the Bank Nifty index?
You may buy shares listed on the Bank Nifty Index by searching on Groww, which will also provide you with information on the index and other resources.
How many Banknifty lots can we buy?
The Bank Nifty lot size has been reduced from 40 to 20 as of today. If you already have a place for one lot of 40 units, you will now have two lots of 20 units. The order freeze quantity (maximum size per order) remains at 2500. (125 lots).
Is it better to invest in Nifty or Bank Nifty?
Both Nifty Financial Services and Nifty Bank have outperformed the Nifty 50 index during the last 10 years. The expanding participation of banks and financial services in India’s overall market capitalisation reflects this.
In the last three years, the broader financial services industry has begun to distinguish itself from banking, and the Nifty Financial Services index has consistently outperformed the Nifty Bank index.
In the vast majority of cases, the Nifty Financial Services index has outperformed the Nifty Bank index and the Nifty 50 index, whether measured in terms of yearly performance or absolute performance over time.
Both the Nifty Bank and Nifty Financial Services indexes are more volatile than the broader market index, the Nifty 50, due to their concentrated character. The Nifty Bank index, on the other hand, is more volatile, with a standard deviation of 1.55 (Figure 2), due to the fact that it only includes pure banking companies, which are more subject to business cycles and may experience volatility during economic downturns. With a standard deviation of 1.46, the Nifty Financial Services index has a slightly lower standard deviation.
The larger drawdowns experienced by the Nifty Bank and Nifty Financial Services indices in most negative market cycles as opposed to the Nifty 50 indices indicate their volatility (Table 4). Nifty Bank has the biggest drawdowns in four of the six bear market occurrences, with Nifty Financial Services doing marginally better.
We believe that improved financial performance and loan books for high-quality banks and select NBFCs will benefit India’s larger financial services sector. Other positive factors include insurance sector expansion, rising retail participation in capital market-related enterprises, and a strong focus on digitalization in the financial sector.
Given the enormous space for growth of financial services and products in India, the Nifty Financial Services index, and thus index funds and ETFs benchmarked to it, are projected to outperform the Nifty Bank index. It can be included in a tactical portfolio by investors who prefer the benefits of steady compounding of returns over time.
The core banking industry, on the other hand, offers a more concentrated opportunity, with some near-term tailwinds in its favor. Indian banks have surmounted a number of challenges, including slow credit growth and rising provisioning costs, and are now in the process of consolidating. Capex resurgence, improved credit growth, and government policies all promise well for this sector in the future. Large private banks with a strong capital position, granular liability franchise, diversified asset base, and more digital usage are well positioned to profit from the capex revival cycle.
In futures, who pays the initial margin?
Why are margins required when buying or selling a futures contract? Futures trading is risky since price movements can go against you. If you buy Nifty futures at a price of 10,300 and the Nifty drops to Rs.10,200, you will lose money, and that is the risk you are taking. Markets are inherently volatile, and these margins are essentially gathered to mitigate the risk of market volatility. So, what exactly is futures margining and how does it work? In general, there are two sorts of margins that are gathered. You must pay the Initial Margin on the trade (SPAN + Exposure margin) at the time of taking the position.
The SPAN margin is calculated using the VAR statistical concept (Value at Risk). Essentially, the initial margin should be wide enough to absorb the loss of your position in 99 percent of circumstances. There will be days when the Black Swan appears, but that is a separate matter. The initial margin is calculated using the portfolio’s maximum possible loss in a single day. The higher the stock’s volatility, the higher the risk, and thus the higher the initial margin. The mark-to-market (MTM) margin, which is collected for daily fluctuation in the price of futures, is the second form of margin. The first margin only considers the danger of a single day. If the stock continues to move against you (falling when long, rising when short), the MTM will be collected on each succeeding day. So, how does the futures margin in practice work? Let’s look at a live example of Initial Margins and MTM margins to learn more about margins on futures contracts.
The starting margin is calculated as the total of the SPAN and Exposure margins in the chart above. The stock exchange determines the minimum margins required for each given position. Brokers are allowed to collect more than this margin, but they are not allowed to collect less. The ACC contracts for November, December, and January are considered in the table above. As the contract matures further into the future, the margins will increase due to increased risk. The three types of initial margins levied by the broker on your futures account are what matters here. Let’s look at the specifics of this futures margin example.
This is the standard margin that must be charged if you want to carry your futures trade ahead beyond the day. Depending on the risk and volatility of the stock, the initial margin for a Carry Forward trade typically ranges from 10% to 15% of the contract’s notional value. In the example above, the notional value of the futures contract for the November 2017 contract is Rs.708,580/- (1771.45 X 400). The initial margin is collected at Rs.89,338/- per lot on that notional value, which works out to 12.61 percent of the notional value. As previously stated, the percentage of initial margin for a futures position will be determined by the stock’s volatility and risk.
The standard margin is for a futures position that you intend to continue over to the next day. But what if you want to close the position inside the day? The initial margins (MIS) will be lower because the risk is lower. The initial margin for intraday index futures is set at 40% of the usual initial margin, whereas the initial margin for intraday stock futures is set at 50% of the normal initial margin. In the example above, the margin will be half of the regular margin, or Rs.44,669/-. Margin Intraday Square-off (MIS) margin is the name given to this margin.
The BO/CO margin is the third category, and it is even lower than the MIS margin. The Bracket Orders and Cover Orders are the two types of orders. The intraday trade in a cover order is required to have an in-built stop loss. The Bracket Order takes it a step further by defining a stop loss as well as a profit target, resulting in a closed bracket order. The margin in this situation will be 30-33 percent of the typical margins, which is Rs.28,343/- in the case of ACC.
One thing to keep in mind is that in the case of MIS orders, CO orders, and BO orders, your broker’s risk management system (RMS) will typically close out any open positions 15-30 minutes before the close of stock market trading on the same day.
MTM (Mark to Market) margin is a type of accounting adjustment. If you bought Tata Motors futures at Rs.409, you don’t have anything to worry about as long as the price stays over Rs.409. When Tata Motors’ market price falls below Rs.409, the MTM problem would arise. There are two scenarios here as well. To begin, most brokers will verify if your margin amount is sufficient to cover the SPAN margin if the price drops to Rs.407 or lower. (Remember that SPAN + Exposure Margin equals Initial Margin.) That’s still fine. If the stock price falls below Rs.395, on the other hand, your margin balance is likely to go below the SPAN Margin. The broker will then issue a Margin Call, requesting that you settle the margin deficit, and if you are unable to do so, your position will be closed out by the RMS. MTM margins only apply to carry forward contracts; they do not apply to intraday, BO, or CO positions.
So that’s everything there is to know about margins in futures contracts. The example of futures margins above demonstrates how futures margins function in practice. In a nutshell, it’s a risk mitigation strategy!
What is the formula for calculating Bank Nifty future margin?
The current lot size for the nifty future is 75 quantities. The current trading price of the nifty future is 9800. If any traders decide to take long positions in the nifty futures at 9800 with a stop loss of 9750 and a target of 9900, they should do so.
The total value of one future contract is calculated as follows: Nifty current price 9800 * current lot size 75 = 7, 35, 000/-. The exchange has set an 8 percent margin for a nifty future contract, which means that the money needed to buy or sell one nifty future lot will be 8 percent of 7, 35,000/-, or 58,800/- rupees.
Traders must pay only the premium amount when buying nifty options; there will be no margin scenario when selling nifty options. Traders must pay nifty future margin plus nifty premium when selling nifty options.
For example, if the nifty 9800 call option is trading at 100 rupees, traders must spend = nifty options premium 100 rupees * 75 quantity lot size = 7500 rupees to purchase 1 lot of the nifty 9800 call option.
Traders must pay about = nifty future margin of 58,800/- + 7500 rupee premium amount = 66,300/- rupees to sell the identical nifty options contract.
Nifty futures buy call 9800 to 9900 made a profit of +100 points, with each point worth 75 rupees. So, if the nifty buy position hits its target of 9900, the trader will profit by 100 points. * Lot size of 75 quantities Equals 7500 rupees each lot. If a trader’s stop loss is struck at 9750, the stock will lose 50 points. * Lot size of 75 quantities = 3750 rupees each lot. The same can be said about clever options.
How can I purchase Bank Nifty stocks on Zerodha?
You can input “Nifty Weekly” to bring up the weekly contract drop-down menu, from which you can choose the contract you want to trade. You may also type the trading symbol and the strike price together. You’ll see a list of existing contracts for that strike price in a drop-down menu.