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The Nifty Futures

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• Nifty futures
• Nifty futures
• Futures pricing
• Hedging with futures
• Notes

9.1 – Basics of the Index Futures

The Nifty Futures holds a very particular place in the world of Indian derivatives. The most liquid contract in the Indian derivative markets is the “Nifty Futures,” which is the most commonly traded futures product. Nifty Futures is really among the top 10 index futures contracts traded globally, which may surprise you. Like many of us, I would anticipate that once you become familiar with futures trading, you will start actively trading the Nifty Futures. It would make sense to fully comprehend Nifty futures in light of this. However, before we continue, I would like you to review the Index as we have already talked about it here.

I’m going to talk about the Index Futures or the Nifty Futures now that I’m assuming you are familiar with the index’s fundamentals.

The futures instrument, as we are aware, is a derivative contract whose value is derived from an underlying asset. The Index itself serves as the underlying for Nifty futures contracts. The Nifty Index is where the Nifty Futures derive their value from. This implies that as the Nifty Index’s value increases, so will the value of Nifty futures. The Index futures would also decrease in value if the Nifty Index’s value dropped.

Nifty Futures are  in three variations: current month, mid-month, and far month, much like any other futures product. For your reference, I have highlighted the same phrase in red. Additionally, I have highlighted the Nifty Futures price, which was Rs. 11,484.9 per unit of Nifty at the moment I took this picture. 11,470.70 rupees were the corresponding underlying value (index value in the spot). The futures pricing formula is the reason why there is, of course, a discrepancy between the spot price and the futures price. In the following chapter, we shall comprehend the ideas pertaining to futures pricing.

The lot size is 75 if you’ve noticed. The contract’s value is  to be –

CV is Futures Price times Lot Size

= 11484.90 * 75

= Rs.861,367/-

These facts ought to provide you with a fundamental overview of the Nifty Futures. Its liquidity is one of the primary characteristics of Nifty Futures that contributes to its popularity. Now that we have a better understanding of what liquidity is and how to quantify it, let’s move on.

9.2 – Impact Cost

24th August 2021 update – The fee that a buyer or a seller must suffer while completing a transaction in certain security is  as Impact Cost by the NSE. In comparison to the bid-ask spread, it gives a far more realistic picture of the costs traders incurs while executing a trade. It is a measure of market liquidity. It fluctuates depending on the magnitude of the transaction and is  separately for the buy-side and the sell-side. Due to its dynamic nature, the Impact cost is always shifting in response to the order book. One of the requirements for eligibility for companies to be  in indexes (such as Nifty 50, and Nifty 500) is that the impact cost must be below a specific threshold.

The effect cost is  using the following formula:

(Best Buy Price in Orderbook + Best Sell Price in Orderbook) / 2 is the ideal price.

Actual Buy Price = Total Quantity – (Quantity * Execution Price)

Impact Cost (for that specific quantity) is  as follows: Ideal Price * 100 / (Actual Buy Price – Ideal Price).

Let’s say someone wishes to purchase 350 units of Infosys. Let’s now determine the transaction’s impact cost.

Ideal Price =(1657.95+1658)/2 = 1657.975 ~ 1657.98

Actual Buy Price is  as follows: (15*1658) + (335*1658.20) / 350 = 1658.19143 1658.19

((1658.19 – 1657.98) / 1657.98) * 100 = 0.012 percent) is the impact cost for purchasing 350 shares.

The following are a few essential lessons I want you to learn from our discussion:

  1. Giving a perception of liquidity through impact cost
  2. Impact cost decreases when a stock’s liquidity increases.
  3. Another sign of liquidity is the difference in the price at which something is bought and sold.

1. The impact cost is larger the wider it is.

2. The effect cost is smaller the narrower it is

4. Liquidity increases and reduces volatility.

5. Placing market orders is not a good idea if the stock is not liquid.

9.3 – Why trading Nifty makes sense

The Nifty Index, as you are aware, consists of 50 stocks. These stocks were  to cover a broad spectrum of India’s economic sectors. Because of this, the Nifty is a good indicator of India’s overall economic activity. This naturally suggests that if overall economic activity is increasing or is anticipated to increase, the Nifty’s value will increase as well, and vice versa. Additionally, compared to trading single stock futures, trading Nifty Futures is a far superior option. There are numerous causes for this; here are a few:

It is  – From a risk perspective, it can occasionally be difficult to make a direct call on a single stock. Let’s imagine, for illustration purposes, that I decide to purchase Infosys Limited in the anticipation of positive quarterly results. In the event that the results don’t satisfy the markets, my P&L and the stock would undoubtedly suffer. On the other hand, Nifty Futures features a diverse portfolio of 50 stocks. The movement of the Index does not truly depend on a single stock because it is a portfolio of stocks. Of course, occasionally a few stocks (index heavyweights) can somewhat affect the Nifty, but not regularly.

In other words, when trading Nifty futures, “unsystematic risk” is entirely eliminated, and only “systematic risk” is dealt with. I am aware that we are introducing a new language here, however, we will go into more detail about these concepts when we discuss hedging.

Nifty’s movement is a reaction to the overall movement in India’s top 50 companies, making it difficult to manipulate (by market capitalization). As a result, there is almost no room for manipulating the Nifty index. The same cannot be  about certain stocks though (remember Satyam, DHCL, Bhushan Steel, etc)

High Liquidity (Easy Fills, Less Slippage): Earlier in the chapter, we covered liquidity. You can basically transact any amount of Nifty because it is so highly liquid, and you won’t have to worry about losing money on the impact fee. Plus, there is so much liquidity available that you may essentially transact any quantity of contracts.

Margin requirements are significantly lower for Nifty futures compared to individual stock futures. Nifty’s margin requirements range from 12 to 15 percent, while individual stock margins can be as high as 45 to 60 percent.

Taking a broader economic prediction is necessary when trading Nifty futures as opposed to making company-specific directional calls. I’ve found that the former is considerably simpler to do than the latter.

Application of technical analysis – On liquid instruments, technical analysis is most effective. Since liquid equities are difficult to manipulate, their movements are typically determined by the market’s dynamics of supply and demand, which is obviously what a TA mostly depends on.

Less volatile – When compared to individual stock futures, Nifty futures are less volatile. To put things in perspective, the annualized volatility of the Nifty futures is about 16–17%, whereas that of individual stocks, like Infosys, can reach 30%.


  1. The Nifty Index in spot, which serves as its underlying, determines the value of Nifty Futures.
  2. The Nifty futures lot size is 75 at the moment.
  3. The most liquid futures contract in India is the Nifty futures contract.
  4. Nifty Futures contracts are available with three different expiration options, just like other futures contracts (Current month, Mid Month, and Far Month)
  5. An arbitrarily quick instantaneous deal known as a “round trip” entails buying at the best sell price and selling at the best buy price.
  6. A round-trip trade is always unsuccessful.
  7. Impact cost calculates a round-trip loss as a percentage of the average bid and ask.
  8. Fewer liquidity results from higher impact costs, and vice versa.
  9. Due to impact cost, when you place a market order to transact, you could lose some money.

  10. The most liquid contract to trade is Nifty, which has an effective cost of about 0.0082 percent.