One of India’s most widely traded Futures Investments and liquid contracts is Nifty Futures. It is a derivative that derives its value from the underlying asset. Under this, the underlying asset is the National Stock Exchange or NSE’s Nifty index. Trading this instrument is like trading in the market since it generally represents the market and the Indian economy. Some other things to remember are:
1. Leverage position
Nifty Derivatives are leveraged like any other Future position. Leverage means your profits multiply, but your losses intensify. Hence, trade Nifty Futures with strict stop loss and profit targets.
2. Spread over spot
Futures Spread, an arbitrage technique, means a trader takes two positions on an asset to benefit from the price discrepancy. Here, is the spread and post index. While trading Nifty Future price, remember not to buy them when it is at a steep premium or discount to the spot index. This may mean either too much optimism or a sign of upcoming aggressive selling.
3. Impact cost
This is the cost a buyer or seller bears when executing a transaction. It measures the market liquidity and provides a more accurate picture of the cost traders undertake than the bid-ask spreadwhen executing a trade. Impact cost gets calculated by dividing the difference between the actual buy price and the ideal price by the ideal price and multiplying the result with 10. Remember, the more liquid an asset is, the less the impact cost.
4. Open interest
It is the total outstanding contracts held by market participants at the end of each trading day. It measures the total activity in the Futures Market. Before taking the position, check the open interest to determine whether it builds on the long or short sides. It provides better insights into market direction.
5. Margin implications
Whether you do Nifty Future Investing, a linear position leads to unlimited profits and losses. To prevent unlimited losses, you should stop losses. However, you should also keep the margins in mind. This is the sum you deposit and have handy when you open a Future position. There are several margins you pay:
Initial Margin: Paid when taking the position that includes:
- VAR Margin: Value at Risk margin is collected upfront and adjusted against your total liquid assets during trading time. It covers the largest loss you meet on 99% of the days.
- ELM Margin: The Extreme Loss margingets blocked besides VAR for situations not covered under the VAR estimation. It is adjusted from your total assets in real-time.
MTM Margin: The Mark to Market margin gets calculated on all open positions by the end of each trading day. It gets calculated by comparing the transaction price with the asset’s closing price under question.
