Featured Image Caption: Tips for Nifty Futures Trading
Futures Derivatives ‘derive’ their value from an underlying financial asset like Stocks, Bonds, or indexes. They help investors gain exposure to various financial instruments while assisting them in hedging and managing risks. The most widely traded futures instrument is the Nifty Futures, and precisely why it is also the most liquid contract in the Indian market. It is, in fact, among the top 10 Index Futures contracts traded in the world.
Nifty Futures gets its value from the Nifty index, meaning if the value of Nifty goes up, the value of Nifty Futures will follow. Thanks to its high liquidity, low manipulation risk, high diversification, and low margins, trading in Nifty Futures is beneficial even during high volatility. However, it helps if you consider the following things when trading in Nifty Futures.
The difference in Spot and Futures prices is called the spread. Futures always trade at a spread over the spot price. Typically, Futures quote at a premium. But remember, not to consider when nifty Future price is at a steep premium to the Spot price. Usually, such instances reflect overpricing or too much optimism. Similarly, avoid buying Nifty Futures at a discount as it means aggressive Futures selling.
Leverage means your profits are multiplied, but this is also true for your losses. To prevent high losses, always trade-in Nifty Futures with strict profit targets and stop losses.
You should crunch some data before taking a Nifty futures position. Look at the open interest (OI) of the Nifty Futures as it gives some idea if the open interest is building on the long or short side. You make informed decisions with data on your hands.
While stop losses are essential, pay attention to the margins as they have capital allocation implications. You pay margins when you take a position while trading Nifty Derivatives such as VAR and ELM margins. VAR covers the largest loss you can encounter on 99% of the day. ELM is a margin blocked besides VAR to cover risk situations that do not come under VAR.
You also pay mark to market margins (MTM) daily. In MTM, your profit or loss for the day gets adjusted and entitled.
Your stop losses do not cover the overnight risk. Overnight positions are still open at the end of the trading day. Such positions are vulnerable to changes in the international markets that thereby impact the domestic market. For example, if Dow crashes overnight, the Nifty might break 200 points on opening. Stop losses do not save you if you are long on Nifty Futures.
While trading Nifty Futures, there are also brokerage and statutory costs that impact your breakeven. Your capital gains and losses also invite tax implications since Nifty Futures get treated as securities.
Keep track of dividends, tax, and transaction costs
It’s important to keep in mind while trading Nifty future that you are committing real money, where these 3 factors are critical.
- Futures don’t pay any dividends, which means dividends cause futures to trade at discount.
- While trading Nifty prediction there are statutory costs and brokerage costs that may impact your breakeven point.
- Any type of profit & loss will be considered as capital gain & loss as Nifty futures are treated as securities for tax purposes corresponding to tax implications.