What are Nifty Futures Contract? | Espresso

Nifty Futures Explained

The stock market offers a wide range of investing opportunities. Depending on your risk appetite, market knowledge, and long-term goals, you can pick from these options. Today, we will go into the depth of Nifty Futures (a type of investment option).

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What are Nifty Futures?

A Nifty future is a type of derivative contract. It derives its value from the underlying assets, which is the Nifty50 index. If the Nifty50's overall value increases, so do the price of futures contracts. If the index falls, prices tend to fall. Nifty futures allow both buyers and sellers to participate in the Nifty50 index stocks at a predetermined price on a future date.

A Quick Glance at Nifty Futures Features

If you want to invest in Nifty Futures, you should be aware of the following features.

  • The trading symbol of Nifty Future is NIFTY (equity derivative).
  • The type of instrument under this trading option is Index futures.
  • The underlying assets of this contract are the NIFTY 50 index.
  • The approximate value of the single lot is ₹5 lakhs.
  • The existing lot size of the Nifty Futures is 75 shares.
  • The SPAN margin (NIFTY NSE) for Nifty Futures is 5%.
  • The exposure margin for Nifty Futures (NIFTY NSE) is 3%.

Different Types of Nifty Future Contract

The Nifty Futures contract is of two types, which are described below.

  • Call Option

Under the call option, as a contract owner, you must purchase a Nifty index within the specified time frame. The contract also specifies the price at which you must acquire. However, there is no mandatory requirement to exercise the option.

  • Put Option

The second component is the put option. It is completely contrary to the call option. Again, as a contract owner, you have the opportunity to sell the Nifty index. But, again, you are not bound to exercise this option.

Understand the Working Model of the Nifty Future Investing Contract

Decoding the concept of Nifty Futures investing is difficult if you are new to investing. However, here is an example to help you grasp it in layman's terms.

Imagine you and a friend as the two parties to the Nifty Future contract.

Let's say the current Nifty trading price is ₹10,000. After doing your calculations, you predict that prices will rise in the near future. Now, with a margin on a portion of the contract's price, you purchase a single lot of Nifty futures and acquire 75 shares. You are now eligible to get these shares at ₹10,000 from your friend.

If your prediction falls accurate and the share prices rise to ₹10,200, you can exercise the call option. Then, you can buy the shares from your friend and can resell them at a premium of ₹200. Doing so will result in a profit of ₹15,000 (75 shares × premium of ₹200). 

Another scenario that might occur is if your prediction falls incorrect and the Nifty future prices drop by ₹200. In this scenario, your friend has the choice to use the put option. And if he does that, you will face a loss of ₹200 per share.

Key Points to Remember When Trading in Nifty Futures

  • Evaluate the spread over spot:

The spread over spot is usually derived from the funds' costs. It is also known as cost of carry. Here, you must follow the two basics.

  • Avoid investing in Nifty futures when the premiums are significantly higher than the spot index. It might be a sign of overpricing. 
  • Similarly, avoid purchasing at a discount. It may imply aggressive selling. 

Always remember, before making any decisions, you must first learn the Nifty fundamentals.

  • Analyse open interest data:

Always check the Nifty future open interest rate. Spend some time analysing scientific data to determine if the open interest is swelling on the short or long side. It will help you make an informed decision on your Nifty positioning.

  • Treat your Nifty futures position is leveraged:

If you purchase a Nifty lot in the coming month, your normal trade margin is 10%, and your intraday (MIS) trade margin is 5%. This translates to twenty times intraday and ten times normal trade leverage.

Leveraging your position may multiply your profit or loss, depending upon the situation.

  • Additional expenses:

Nifty futures contracts come with brokerage and statutory costs. These costs can narrow your profit percentage significantly. Furthermore, the profit from such an investment is treated as capital gains under the Income Tax Act. Therefore, you must pay taxes on it based on your holding period. Therefore, always think about these costs before Nifty future investing.

Conclusion

Future contracts are beneficial to various types of investors. However, before you invest, make sure you have weighed all of the risk factors. Also, try to discern the counterparty's rationale for selling the shares. It will aid you in making price predictions.

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Frequently Asked Questions

There are three different time durations related to trading in Nifty futures contracts that traders should keep in mind.

  • One month or near month
  • Two months or middle month
  • Three months or far month

You must first open a trading account if you want to trade in Nifty futures. Opening a Demat account is not necessary here. After you open a trading account, you can trade on both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Many investors choose to trade on the NSE. This is because NSE is viewed as a liquid derivatives exchange.

The three prime reasons for trading in the Nifty future are:

  • First, they are regulated by the Securities and Exchange Board of India (SEBI).
  • They offer liquidity benefits.
  • You can leverage your position

You can settle the contract by performing an opposing transaction prior to the contract's expiration date. However, remember that a Nifty future contract does not entail the actual purchase or sale of the underlying asset. As such, there is also no physical settlement.

Trading in Nifty futures contracts works on the fundamentals of margin trading. It implies that you can take a position by paying a little margin money. Such a type of trade also allows you to mitigate your losses.