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.
How can I get started trading Nifty futures?
Because the Nifty is fairly indicative of the market and the economy in general, investing in Nifty futures is a typical proxy for trading the market as a whole. Nifty futures are simply Nifty futures contracts. The Nifty’s minimum lot size is 75 units, putting the lot value at just over Rs.7.50 lakhs. What are the best strategies for trading Nifty futures and how do you trade Nifty futures? Let’s go over some key points to keep in mind as we learn how to trade Nifty futures intraday and in the long run.
Futures typically trade at a discount to spot prices. The monthly spread over the spot price is established by the current cost of funds under normal circumstances. Futures typically quote at a premium to the cost of carry, which is also known as the cost of carry. There are two things to keep in mind here. If Nifty futures are trading at a significant premium over the spot index, it could be a sign of overpricing and overconfidence. Also, don’t buy when the Nifty futures are trading at a discount, as this could indicate strong futures selling. Before trading Nifty futures, you need understand the spread’s logic.
Nifty futures, like all futures contracts, are leveraged. Your margin is roughly 10% for normal trading and 5% for MIS (intraday) deals when you buy one lot of Nifty in the next month. That means a conventional trade is 10 times leveraged, whereas intraday trades are 20 times leveraged. This is true in both directions. Profits can be multiplied by leverage, but losses can be multiplied as well. As a result, any trading in Nifty futures must follow rigorous stop-loss and profit-target guidelines.
Before buying Nifty futures, it’s always a good idea to undertake some scientific data research. A brief examination of the Nifty futures open interest and accumulation trends will reveal if the open interest is rising on the long or short side. You can gain a better understanding of the Nifty’s direction.
Because the Nifty futures is one of the most liquid products, liquidity is never a huge issue, but there are times when the Nifty futures might get you into a liquidity bind. To begin with, after the rollovers are significantly finished on the expiry day, the volumes on the Nifty futures usually vanish. Furthermore, in a market that is rapidly declining, spreads can widen dramatically, increasing your risk when trading Nifty futures.
Buying or selling Nifty futures is a linear position since it can result in endless profits and losses on both sides. When trading the Nifty, stop losses are essential, but one must also be aware of the margins. To begin, you must pay an initial margin, which includes the VAR and ELM margins, at the time of taking the position. Brokers must now collect both of these margins, and ELM is no longer an option. Second, you must pay MTM (mark to market) margins based on price change on a daily basis. These have an impact on your capital allocation.
Even if you place stop losses throughout the day, they will not cover the danger you face overnight. What do you do, for example, if you are long on Nifty Futures and the Nifty drops 200 points on opening owing to a Dow crash? Stop losses don’t operate in Nifty futures, so you’re exposed to overnight risk.
This is an intriguing feature of trading Nifty futures. When you buy Nifty futures, another party is selling, and when you sell Nifty futures, the same rationale applies. The other party could be a trader or a hedger, and open interest data will provide you with the information you require. While your Nifty view is typically what drives you, it is always beneficial to comprehend the opposing view because it can help you clarify your Nifty vision. When dealing in Nifty Futures, there are eight factors to keep in mind.
When trading Nifty futures, keep in mind that you are risking real money, thus three factors are crucial. For starters, futures do not pay dividends, hence dividends cause futures to trade at a discount. Consider this when making a decision. Second, there are brokerage and statutory charges to consider when trading Nifty futures. This has an impact on your breakeven point. Finally, because Nifty futures are classified as securities for tax purposes, any profit or loss will be treated as a capital gain or loss, with the corresponding tax implications.
With an example, how does futures trading work?
Traders can lock in the price of an underlying asset or commodity using futures, also known as futures contracts. These contracts have set prices and expiration dates that are known in advance. The month of expiration is used to identify futures. A December gold futures contract, for example, expires in December.
How do I go about trading futures?
Futures trading allows investors to speculate or hedge on the price movement of a securities, commodity, or financial instrument. Traders do this by purchasing a futures contract, which is a legally binding agreement to buy or sell an asset at a predetermined price at a future date. Grain growers could sell their wheat for forward delivery when futures were invented in the mid-nineteenth century.
How many lots of Nifty futures can we buy?
What is the maximum number of lots I may buy/sell in a single day of nifty futures? There is a limit of 200 lots per order. Overall, as a client, you can take positions worth up to 5% of the contract’s total open interest.
To trade futures, how much money do you need?
If you assume you’ll need to employ a four-tick stop loss (the stop loss is four ticks distant from the entry price), the minimum you should risk on a trade in this market is $50, or four times $12.50. The minimum account balance, according to the 1% rule, should be at least $5,000 and preferably higher. If you want to risk a larger sum on each trade or take more than one contract, you’ll need a bigger account. The recommended balance for trading two contracts with this method is $10,000.
What is the size of a futures lot?
A lot size in futures is the smallest number of shares that can be traded in a single transaction. You can only buy and sell futures and options in increments of one lot or multiples of the lot size while trading futures and options. The lot size of the Nifty, for example, is 75 units, thus you can only trade it in multiples of 75.
Is it possible to sell futures before they expire?
Purchasing and selling futures contracts is similar to purchasing and selling a number of units of a stock on the open market, but without the need to take immediate delivery.
The level of the index moves up and down in index futures as well, reflecting the movement of a stock price. As a result, you can trade index and stock contracts in the same way that you would trade stocks.
How to buy futures contracts
A trading account is one of the requirements for stock market trading, whether in the derivatives area or not.
Another obvious prerequisite is money. The derivatives market, on the other hand, has a slightly different criteria.
Unless you are a day trader using margin trading, you must pay the total value of the shares purchased while buying in the cash section.
You must pay the exchange or clearing house this money in advance.
‘Margin Money’ is the term for this upfront payment. It aids in the reduction of the exchange’s risk and the preservation of the market’s integrity.
You can buy a futures contract once you have these requirements. Simply make an order with your broker, indicating the contract’s characteristics such as theScrip, expiration month, contract size, and so on. After that, give the margin money to the broker, who will contact the exchange on your behalf.
If you’re a buyer, the exchange will find you a seller, and if you’re a selling, the exchange will find you a buyer.
How to settle futures contracts
You do not give or receive immediate delivery of the assets when you exchange futures contracts. This is referred to as contract settlement. This normally occurs on the contract’s expiration date. Many traders, on the other hand, prefer to settle before the contract expires.
In this situation, the futures contract (buy or sale) is settled at the underlying asset’s closing price on the contract’s expiration date.
For instance, suppose you bought a single futures contract of ABC Ltd. with 200 shares that expires in July. The ABC stake was worth Rs 1,000 at the time. If ABC Ltd. closes at Rs 1,050 in the cash market on the last Thursday of July, your futures contract will be settled at that price. You’ll make a profit of Rs 50 per share (the settlement price of Rs 1,050 minus your cost price of Rs 1,000), for a total profit of Rs 10,000. (Rs 50 x 200 shares). This figure is adjusted to reflect the margins you’ve kept in your account. If you make a profit, it will be added to the margins you’ve set aside. The amount of your loss will be removed from your margins if you make a loss.
A futures contract does not have to be held until its expiration date. Most traders, in practice, exit their contracts before they expire. Any profits or losses you’ve made are offset against the margins you’ve placed up until the day you opt to end your contract. You can either sell your contract or buy an opposing contract that will nullify the arrangement. Once you’ve squared off your position, your profits or losses will be refunded to you or collected from you, once they’ve been adjusted for the margins you’ve deposited.
Cash is used to settle index futures contracts. This can be done before or after the contract’s expiration date.
When closing a futures index contract on expiry, the price at which the contract is settled is the closing value of the index on the expiry date. You benefit if the index closes higher on the expiration date than when you acquired your contracts, and vice versa. Your gain or loss is adjusted against the margin money you’ve already put to arrive at a settlement.
For example, suppose you buy two Nifty futures contracts at 6560 on July 7. This contract will end on the 27th of July, which is the last Thursday of the contract series. If you leave India for a vacation and are unable to sell the future until the day of expiry, the exchange will settle your contract at the Nifty’s closing price on the day of expiry. So, if the Nifty is at 6550 on July 27, you will have lost Rs 1,000 (difference in index levels – 10 x2 lots x 50 unit lot size). Your broker will deduct the money from your margin account and submit it to the stock exchange. The exchange will then send it to the seller, who will profit from it. If the Nifty ends at 6570, though, you will have gained a Rs 1,000 profit. Your account will be updated as a result of this.
If you anticipate the market will rise before the end of your contract period and that you will get a higher price for it at a later date, you can choose to exit your index futures contract before it expires. This type of departure is totally dependent on your market judgment and investment horizons. The exchange will also settle this by comparing the index values at the time you acquired and when you exited the contract. Your margin account will be credited or debited depending on the profit or loss.
What are the payoffs and charges on Futures contracts
Individual individuals and the investing community as a whole benefit from a futures market in a variety of ways.
It does not, however, come for free. Margin payments are the primary source of profit for traders and investors in derivatives trading.
There are various types of margins. These are normally set as a percentage of the entire value of the derivative contracts by the exchange. You can’t purchase or sell in the futures market without margins.
Is it possible to sell futures on the same day?
The method of buying and selling a futures contract on the same day without maintaining open long or short positions overnight is referred to as day trading. The duration of day transactions varies. They can last a few minutes or the entirety of a trading session.
Is it possible to trade futures intraday?
“Intraday Future” is developed for traders who want to profit from intraday trading in large quantities while also taking advantage of market conditions. Intraday futures trading has a number of advantages.
- There will be no need to worry about closing open positions because all open positions will be squared off automatically.
Customers who have signed the New Terms & Conditions, both online and offline, are eligible for this service.
Intraday Futures trading is available for stocks that are part of the Nifty 50, MINIFTY, BANKNIFTY, and Nifty index Futures.
Current month contracts are available for intraday futures trading, and near month contracts will be available two days before the current month contract expires (including the expiry day).
To place Intraday Futures orders, 50 percent of SPAN margin is necessary. Due to market volatility and risk perception, Geojit Financial Services Ltd reserves the right to alter the Margin requirement at any time.
All contracts’ SPAN margin requirements can be seen on the Customer Care portal under the F&O Margin Requirement option.
No, regardless of hedge positions, all open Intraday Futures positions will be subject to 50% SPAN margin.
Select the product type FAO-Intraday in the order window to make an Intraday Futures order.
Is there a maximum or minimum amount that can be traded in intraday futures?
Trading in intraday futures has neither a maximum nor a minimum limit.
The 90 percent threshold limit for Intraday Futures positions. The client must guarantee that the available margin with Geojit Financial Services Ltd is always more than the minimum margin requirements.
Geojit Financial Services Ltd may cancel current orders and put square off orders to terminate all or some of the positions to absorb additional margins if the margin deposited with us is erased by 90%.
Intraday Future orders are accepted from 9.15 a.m. until 3.10 p.m., and from 3.10 p.m. onwards. Except for the expiry day of current month futures, where no auto square off will be launched, the auto square off process will be triggered. From 4.15 p.m. until 8.45 a.m., however, after market orders can be placed in this area.
There is presently no way to convert intraday futures into regular futures.
Intraday Futures positions will be subject to standard Futures brokerage and other fees.
- What happens if you don’t have enough clear credit in your account to cover your Intraday Futures trade dues?
Geojit Financial Services Ltd may sell/transfer the shares in the demat account in such circumstances, and the customer will be solely responsible for any losses incurred as a result of the same.
To trade futures in India, how much money do you need?
To trade futures, how much money do I need? Margin is required when trading futures contracts. The amount of margin will be determined by the size of the stake. To place a trade, however, most brokers will require at least 10% advance margin.