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 invest in 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.
How can I get started with futures trading?
Open a trading account with a broker who specializes in the markets you want to trade. A futures broker will most likely inquire about your investment experience, income, and net worth. These questions are meant to help you figure out how much risk your broker will let you take on in terms of margin and positions.
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 margin need for futures?
The intraday margin for index futures is set at 40% of the usual starting margin, whereas the intraday margin for stock futures is set at 50% of the normal initial margin.
Is futures trading riskier than stock trading?
What Are Futures and How Do They Work? Futures are no riskier than other types of assets such as stocks, bonds, or currencies in and of themselves. This is because the values of futures, whether they are futures on stocks, bonds, or currencies, are determined by the prices of the underlying assets.
How can I trade futures in a secure manner?
Here are seven suggestions for moving forward.
- Make a trade strategy. The first piece of advice cannot be overstated: meticulously plan your trades before taking a position.
Is it lucrative to trade F&O?
The value of futures and options is determined by the underlying, which might be a stock, index, bond, or commodity. For the time being, let’s concentrate on stock and index futures and options. The value of a stock future/option is derived from a stock such as RIL or Tata Steel. The value of an index future/option is derived from an underlying index such as the Nifty or the Bank Nifty. F&O volumes in India have increased dramatically in recent years, accounting for 90 percent of total volumes in the industry.
F&O, on the other hand, has its own set of myths and fallacies. Most novice traders consider F&O to be a less expensive way to trade stocks. Legendary investors like Warren Buffett, on the other hand, have referred to derivatives as “weapons of mass destruction.” The truth, of course, lies somewhere in the middle. It is feasible to benefit from online F&O trading if you master the fundamentals.
1. Use F&O as a hedge rather than a trade.
This is the fundamental philosophy of futures and options trading. F&O is a margin business, which is one of the reasons retail investors get excited about it. For example, you can buy Nifty worth Rs.10 lakhs for just Rs.3 lakhs if you pay a margin of Rs.3 lakhs. This allows you to double your money by three. However, this is a slightly risky approach to employ because, just as gains can expand, losses in futures might as well. You’ll also need enough cash to cover mark-to-market (MTM) margins if the market moves against you.
To hedge, take a closer look at futures and options. Let’s take a closer look at this. If you bought Reliance at Rs.1100 and the CMP is Rs.1300, you may sell the futures at Rs.1305 and lock in a profit of Rs.205 by selling the futures at Rs.1305 (futures generally price at a premium to spot). Now, regardless of how the price moves, you’ve locked in a profit of Rs.205. Similarly, if you own SBI at Rs.350 and are concerned about a potential fall, you can hedge by purchasing a Rs.340 put option at Rs.2. You are now insured for less than Rs.338. You record profits on the put option if the price of SBI falls to Rs.320, lowering the cost of owning the shares. By getting the philosophy correct, you can make F&O operate effectively!
2. Make sure the trade structure is correct, including strike, premium, expiration, and risk.
Another reason why traders make mistakes with their F&O deals is because the trade is poorly structured. What do we mean when we say a F&O trade is structured?
Check for dividends and see if the cost of carry is beneficial before buying or selling futures.
When it comes to trading futures and options, the expiration date is quite important. You can choose between near-month and far-month expiration dates. While long-term contracts can save you money, they are illiquid and difficult to exit.
In terms of possibilities, which strike should you choose? Options that are deep OTM (out of the money) may appear to be cheap, but they are usually worthless. Deep ITM (in the money) options are similar to futures in that they provide no additional value.
Get a handle on how to value alternatives. Based on the Black and Scholes model, your trading terminal includes an interface to determine if the option is undervalued or overvalued. Make careful you acquire low-cost options and sell high-cost options.
3. Pay attention to trade management, such as stop-loss and profit targets.
The last item to consider is how you handle the trade, which is very important when trading F&O. This is why:
The first step is to put a stop loss in place for all F&O deals. Keep in mind that this is a leveraged enterprise, thus a stop loss is essential. Stop losses should ideally be included into the trade rather than added later. Above all, Online Trading requires strict discipline.
Profit is defined as the amount of money you book in F&O; everything else is just book profits. Try to churn your money quickly since you can make more money in the F&O trading company if you churn your capital more aggressively.
Keep track of the greatest amount of money you’re willing to lose and adjust your strategy accordingly. Never put more money on the table than you can afford to lose. Above all, stay out of markets that are beyond your knowledge.
F&O is a fantastic online trading solution. To be lucrative in F&O, you only need to take care of the three building components.
When Nifty futures expire, what happens to them?
Contracts for the future You can buy another futures contract to sell 1000 shares of XYZ firm on the expiration date. The first contract to sell the shares is nullified by this new contract, which remains in effect. You would have to settle the price discrepancy, if any, in such circumstances.
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.