Nifty Future is the most traded derivative in the Indian Stock Market derivatives. It is only until you understand the potential a derivative carries for you to start trading nifty derivatives.
It is not without a reason that Nifty Futures contract is one of the highly traded future in the Indian Derivatives. This when compared to the world derivative market it ranks among the top traded derivatives.
Understanding Index is very important for you to take a further understanding of derivatives.
What is Nifty Futures?
In short, Index is the combination of stocks which together form the yardstick to measure the performance of the entire gamut of stocks that are listed on National Stock Exchange. The index consists of the stock from various sectors and based on certain predefined criteria stock from various sectors are selected. The selection of 50 stock form an index named Nifty 50.
To understand first from the basic one should understand what is a derivative. Any instrument which is traded in the stock market and it derives its value from the underlying index or stock is called derivative. In our case, we are discussing Nifty 50 for the Nifty Future. Then the underlying for the Nifty Future would be Nifty 50.
The price of the Nifty Future could be trading at a discount or premium of the Index.
The future contract’s buyer and seller are bound by the price of the underlying to buy and sell the futures contract at a future date based on the price of the future at that point in time.
One can find the NIfty Future e.i. Nifty 50 future contract specification on the NSEIndia Website. Along with other necessary contract specification details.
It is very important for one to Understand the Index Nifty 50 to better understand NIfty Futures. We assume that you are well aware of Nifty 50.
Nifty 50 is constituted with top stock in the Indian Stock Market based on certainly predetermined specifications. Since the price of the nifty future is derived from Nifty 50 their price movements are completely effected from the underlying. If the Index price goes up or down the price of the Nifty future would be affected in a similar fashion.
One of the most frequent questions that I get is why there are no volumes given for Nifty 50. The main reason behind this is that Nifty 50 Index is not tradeable and hence there are no volumes.
The only possible way to trade Nifty Index is through ETF or Nifty Future.
Now getting down to the Nifty Future Contract specification.
The moment you look at the Nifty Futures you would be getting around three options based on the months of expiry. The closed month usually has the highest volumes traded. Rest of the months do not have volumes as much as the nearest month. Also, this is one of the reasons why the other months trade at a higher discounts or premium.
The above screenshot was taken before the market is open and hence all the values are not appearing on the table.
If you notice on the rightmost corner it has the underlying value which is the value of Nifty Index. This price can be found as soon as you open the website www.nseindia.com also when you see the contract specifications.
Let’s take a look at the contract specifications pre-open market.
One of the frequent confusion when newbie try to look at the futures contract for the first time and they end up with this screen. The contract specifications in the above show the total traded volume at the point in time of seeing the specs. Along with underlying value and market lot size.
It also has other important details such as open interest and change in open interest details.
Once the stock market opens you would be able to see Nifty Future contract something like the above screenshot.
The expiry date option is the drop down menu which gives you the options of the current month, mid-month and far month. This can be accessed from the contract snapshot itself.
Also if you see there is a Green refresh button which is at the top next to the quote. On pressing that the prices would be refreshed to the current market price.
The above contract is for the current month which has the whole month before it’s expiry. If you notice carefully the price of the underlying is 10471 while the price of the nifty future is 10519 this is because of the premium and discount based on the nifty future pricing formula.
The similar difference could be found for mid and far months expiry.
Now coming to the Market Lot which is mentioned in our case as 75. The nifty future contract consists of 75 number of an index in its contract.
With this one can calculate the total value of the index. Which is shown below.
Current Total Value = Market Lot * Current Market Price
10519 * 75 =
Now, this is not the value you would be paying to buy one contract. In cost, we will be explaining how much one should pay the actual amount to buy or sell one contract of future.
Now coming to Open Interest.
The above contract shows that the total number open interest is 663225. This is the total number of contract that people are holding positions. It is a fundamental fact that for every buyer there is always a seller.
The above contract also shows if the open interest in increasing or decreasing. Contract exchange hands on a daily basis only those hold the positions overnight are considered in the open position.
Looking at the order book you would find the total number of buyer and sellers are bidding for the contract and at the price at which they are bidding to get the contract.
The Future contract along with their expiry date is in short said something like this NIFTY18JAN. This denotes that the Nifty future contract which is going to expire on the last Thursday of January for the year 2018.
Cost Involved in Nifty Future
As we had discussed above the process to calculate the total value of the contract.
Current Total Value = Market Lot * Current Market Price
10519 * 75 =
Now, to calculate the amount required to transact in nifty we’ll show you another calculation. One should know certain contract specifications before entering the contract which is mentioned below.
Trading Symbol: Nifty
Instrument Type : Index Future
Lot Size: 75 Units
Nifty Span Margin 5%
Nifty Exposure Margin 5%
Lot Value: Rs. 788925 (Based on today’s calculation)
Underlying: Nifty 50 Index
The above lot size implies that every contract either buy or sell should be done in the lot size of 75 or multiples of 75.
Based on the type of trade you are looking to do the amount required largely differs.
Normal Trade in other words in the contract that on intends to carry overnight positions. Once a person has entered a normal position he can carry forward the contract till the date of expiry. Intra-Day Trade position is taken with the purpose to square off the trade in the same day without carrying forward the contract.
The SPAN Margin calculates the span margin and the exposure margin required by the exchanges based on volatility, underlying price movements amongst other factors. The Exposure Margin is usually levied as a percentage of the Value of the Contract in addition to the SPAN Margin.
Intraday trade is again classified into two types first is where there is no stop-loss placed and another is where one places a stop-loss for the trade executed. The one with the stop-loss is called Bracket Order.
Normal Trade Margin Calculation
Nifty18Jan Total Value = 788925
Market Lot = 75
Span Margin = Rs. 39374
Exposure Margin = Rs. 23575
Total Margin = Exposure Margin + Span Margin
Rs. 62949 = Rs. 39273 + Rs. 23575
In short to take a position in Nifty Index for the value of Rs. 788925 one has to have money of Rs. 62949 to buy or sell the contract.
Intraday Trade Margin Calculation
For the Intraday Purpose Exposure margin also is not considered and only the Span Margin is taken into account for the trading purpose. The amount hence arrived is Rs. 39273 (This varies from broker to broker and is based on the current market price of the Nifty)
Bracket Order Trade Margin Calculation
Bracket order otherwise intraday order with stop loss margin differs because the risk is reduced. Usually, the margin is lower when the stop loss is very close to the purchase or sale price.
If the margin for the Intraday trade is Rs. 39273 then for bracket order it could go as low as Rs. 9200 this gives the opportunity to take a position in the stock market for a fraction of the amount.
For a contract of Rs. 790000 the bracket intraday order one has to shell out only Rs. 9200 which is almost 88x leverage.
Again the margin differs from broker to broker and based on the current market price and volatility. Higher volatility
Why Should One Trade Nifty Futures
There are many advantages for one to trade in the Nifty Future. The reason behind it being so popular in the Indian Stock Market is because of the various advantages it carries.
One of the main reason for trading nifty future is because it is diversified. Nifty value is derived from Nifty 50 which consists of 50 stocks. Based on the movement of the 50 stocks the nifty future moves. In short, it is a diversified portfolio of 50 stocks. Any news or information in the stock market of one stock will not a huge impact on the price of the nifty future. No one stock can influence the nifty index price. It also eliminates the unsystematic risk in the stock market. The index is the barometer of the stock market.
The advantage of the margin money lets you take more positions and eventually earn more money in the stock market.
Less risky because the impact of the stock news can be adverse when compared to that of the Index.
When you are dealing with the stock specific there is more information that has to be processed. And sudden news outbreak in the underlying stock can increase the volatility of the stock. Overnight or weekend information that does not get factored into the stock market create volatility in the derivative which is not the case with the index or Nifty futures. Comparatively less Volatility.
Nifty futures can be bought as well as shorted first this gives you an opportunity to make the profit in any market direction.
Higher Leverage gives you more buying power when compared to other derivative contracts.
Highly Liquid contracts save you money on the impact cost which is the difference between the buyers bidding price and sellers bidding price. Also, higher liquidity gives you the option to enter and exit the market at any time. Trading higher quantities could be done effortlessly which is not likely in other future contracts.
Higher liquidity, higher volumes, lower impact costs, and higher leverages; gives very fewer chances of Manipulation in the stock market prices. There is no scope to manipulate the nifty price whatsoever.
Application of technical analysis needs requires certain prerequisites and index futures such as Nifty is apt for such application. Technical analysis can be easily applied and profit from such research.
You don’t have to deal with surprises which can arise from anywhere such as licenses news, order news, earning news, etc.
Trading in Nifty Future is Caveat Emptor has to be traded with lot of Caution and Research.
Ideally, one should Paper Trader and confirm the strategy before trading with real money and investing your hard earned money.
At no point in time at Alpha Trading, we would recommend trading in Nifty Future more than 2%-5% on the entire amount available to trade or invest. Trading Nifty Future is a High Risk and High-Income proposition.
Getting your edge with Trading NIfty Future can sound and be very lucrative. If done in the right way a higher profit in the nifty future trading could give you returns which cannot be otherwise compared. This would also improve entire portfolio returns drastically.