Trading in Nifty futures is a common proxy for trading the market as a whole since the Nifty is fairly representative of the market in particular and the economy in general. Nifty futures are essentially futures contracts on the Nifty. The minimum lot size of the Nifty is 75 units which makes the lot value at a little over Rs.7.50 lakhs. What are the tips for trading in Nifty futures and what are the Nifty futures trading techniques? Let us understand some points to remember which will help us on how to trade Nifty futures intraday and for the longer term.
Check the futures spread over spot before trading
Futures normally trade at a spread over the spot price. Under normal conditions, the monthly spread over the spot price is determined by the prevailing cost of funds. It is also called the cost of carry and futures normally quote at a premium. Two things you need to remember here. Don’t buy Nifty futures when it is at a steep premium to the spot index as it could be a case of overpricing and too much optimism. Also don’t jump in to buy when the Nifty futures at a discount as it could be a sign of aggressive futures selling. Understand the logic of the spread before trading Nifty futures.
This is a leveraged position and you must treat it accordingly
Nifty futures are leveraged like all futures positions. When you buy one lot of Nifty in the near month, your margin is around 10% for normal trades and 5% for MIS (intraday) trades. That means you get 10 times leveraged in a normal trade and 20 times leverage in intraday trades. This works both ways. Leverage means that your profits can get multiplied but losses can also get multiplied. Hence any trading in Nifty futures has to be done with strict stop losses and profit targets.
Check data on open interest before taking a position
It always pays to do some scientific data analysis before taking a Nifty futures position. A quick look at the open interest of the Nifty futures and its accumulation trends will give you an idea of whether the open interest is building on the long side or the short side. You can take a more informed view on the Nifty direction.
Avoid getting in a liquidity trap
Liquidity is never a major challenge for the Nifty futures as it is one of the most liquid contracts but there are occasions when the Nifty futures can get into your liquidity trap. Firstly, on the expiry day you will normally find the volumes on the Nifty futures vanishing once the rollovers are substantially completed. Also, in a market that is falling very sharply, the spreads can widen substantially increasing your risk in trading Nifty futures.
There are multiple margin implications
Whether you buy Nifty futures or you sell Nifty futures, it is a linear position as it can lead to unlimited profits and losses both sides. While stop losses are a must when trading the Nifty, one also needs to understand the margins. Firstly, there is an initial margin you pay at the time of taking the position which includes the VAR margin and the ELM margins. Now it is mandatory for brokers to collect both these margins and ELM is no longer optional. Secondly, on a daily basis you need to pay MTM (mark to market) margins based on the price movement. These have capital allocation implications for you.
Beware the overnight risk in Nifty futures
Even if you put stop losses during the day, these orders will not cover your overnight risk. For example, if you are long on the Nifty Futures and due to a crash in the Dow if the Nifty crashes by 200 points on opening, what do you do? Stop losses don’t work and you are exposed to the overnight risk in Nifty futures.
Understand the trade from the counterparty perspective
This is an interesting aspect of Nifty futures trading. When you are buying Nifty futures then there is another party that is selling and the same logic applies when you are selling Nifty futures. The other party could be a trader or a hedger and the open interest data will give you necessary insights. While you are normally driven by your view on the Nifty, it always pays to understand the counter view as it can give you greater clarity in your Nifty view.
Keep a tab on the dividends, transactions costs and tax implications
When you trade on Nifty futures, remember that you are committing real money and hence three aspects are important. Firstly, futures don’t earn dividends and hence dividends lead to futures quoting at a discount. Factor this when taking a position. Secondly, when you trade Nifty futures, there are implications of brokerage and statutory costs. This makes a difference to your breakeven. Lastly, Nifty futures are treated as securities for tax purposes so any profit or loss will be treated as a capital gain or a capital loss and the tax implications will apply accordingly.
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