Nifty futures is a derivative contract which means it gets its value from the behavior of its underlying asset. Nifty futures’ underlying asset is the Nifty50 index itself. If the value of the index goes up, then the value of the futures contract also increases. Similarly, if Nifty drops, then so do the Nifty futures. Nifty futures contractually give the seller or buyer the right to trade the stocks on the Nifty50 index at a pre-decided price on a future date. This is currently one of the most liquid futures contracts in India which makes it the most traded as well.
There are two types of Nifty Options: call and put. A Nifty call gives the trader the option, without the obligation, to buy an index with underlying Nifty security at a predetermined price during a certain time frame. Alternatively, a Nifty put gives the trader the option, without the obligation, to sell a Nifty index at a predetermined price during a certain time frame.
How does the Nifty Futures contract work?
It’s difficult to grasp what is Nifty futures useful for without explaining how it works, so here’s an example. Suppose Amrita anticipates that Nifty will rise from its current trading price at ₹10,700. By placing a margin on a fraction of the contract’s cost, she can buy one lot of Nifty futures which gives her 75 shares. Amrita is now eligible to receive these shares from her seller, Bharat, for ₹10,700.
Let’s say Amrita’s guess was correct and the shares’ performance grows to ₹10,800. Since she used a Nifty call, Amrita can now buy the shares from Bharat at ₹10,700 while reselling them at ₹10,800. This gives her ₹100 as options premium income for 75 shares adding up to ₹7500 earned from her sale. However, in case Nifty futures fall to ₹10,600, Bharat has the option to now sell the futures to Amrita at ₹10,700 while she incurs a ₹100 loss for each share bought.
Key Features of Nifty Futures
Here are some key features of Nifty Futures.
- Trading Symbol for Nifty Futures: NIFTY (Equity Derivative)
- Type of Instrument: Index Futures
- Current Lot Size: 75 Shares (Units)
- SPAN Margin (NIFTY NSE): 5%
- Exposure Margin (NIFTY NSE): 3%
- Value (Lot Size): Approximately ₹5,00,000
- Underlying Asset: NIFTY 50 Index
Tips to Trade With Nifty Futures Contract
Here are some useful tips to employ when trading with Nifty Futures.
- Treat Your Position as Leveraged: As all futures positions, Nifty futures positions are leveraged. You get a 10% margin for normal trades, and 5% margin for intraday trades when you buy a Nifty lot in the near month. Leverage means that both profits and losses are multiplied. Be wary of the risk of leverage and appropriately use profit targets and, more importantly, stop losses.
- Assess the Spread Over Spot: Before trading in Nifty Futures, it’s important to assess the spread over spot price carefully to understand the reason behind it. Avoid hastily purchasing Nifty Futures lots even if it appears to be a very steep premium compared to the spot price. This spread could be the result of overpricing, which is common. Alternatively, it might not be wise to buy Nifty futures when they appear to be a discount because this could be driven by the desire for aggressive selling.
- Study Open Interest Data: Before taking a Nifty futures position, it is recommended to look at open interest data to assess the accumulation of trends. This will give you an understanding of which direction (long side or short side) the open interest is building on. This analysis of data prior to investing will lead to a more informed decision.
- Empathize with the Counterparty: When purchasing a Nifty futures position, be aware that there is someone on the other end selling those shares to you. This person could be a hedger or trader based on your assessment of the open interest data. Knowing your seller’s intentions will help you in ascertaining why your shares are priced the way they are. This will lead to more clarity regarding your
- Track Additional Costs: Whenever you trade with Nifty futures, there are statutory and brokerage costs. When it comes to your breakeven, these costs can make a significant difference. Also, note that the profit or loss incurred from Nifty futures are treated as capital gains or capital losses. There are now tax implications on capital gains from market instruments, which is also an additional cost. Being mindful of these additional costs can save you money in the long run.