Part 14: Index Futures & Cash-Future Arbitrage

Futures contracts allow traders to take leveraged directional bets on underlying indices (Nifty 50, Bank Nifty) and individual stocks. Since futures represent contracts for future delivery, they carry a cost of carry and are priced at a premium or discount to the spot market. This creates both high-leverage directional opportunities and risk-free arbitrage plays.

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1. Cash-Future Arbitrage (Risk-Free Yield)

Because of market inefficiencies, the futures price of a stock is often higher than its spot price by an amount greater than the prevailing interest rate.

• The Concept: You buy 1 Lot of shares in the Cash segment (e.g. TCS Spot at ₹4000) and simultaneously Sell (Short) 1 Lot of TCS Futures (e.g. TCS Future at ₹4025).
• The Payoff: Since spot and future prices must converge to the exact same price on the day of expiry, your net profit is locked in at ₹25 per share (₹4025 - ₹4000) regardless of whether TCS goes up to ₹5000 or drops to ₹3000.
• Annualized Return: Typically yields 8% to 12% p.a. risk-free, making it an excellent alternative to fixed deposits for short-term capital parking.

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2. Futures Trend Following: 20 EMA + Supertrend

A mechanical trend-following strategy on index futures.

• Instrument: Nifty Near-Month Futures.
• Timeframe: 15-minute chart.
• Indicators: 20-period Exponential Moving Average (EMA) and Supertrend (10, 3).
• Long Entry: Buy Nifty Futures when the 15m candle closes above the 20 EMA and the Supertrend indicator is green.
• Short Entry: Sell Nifty Futures when the 15m candle closes below the 20 EMA and the Supertrend indicator is red.
• Stop Loss: Placed at the Supertrend line or 1.5x the Average True Range (ATR).
• Profit Target: Let the profits run; exit only when the opposite crossover signal occurs (e.g., candle closes below 20 EMA while long).

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3. Futures Calendar Spreads (Rollover Mispricing)

Calendar spreads involve buying and selling futures of different expiries to capture premium expansion or contraction.

• Example Setup: Buy Nifty Far-Month Future (e.g., next month expiry) and Sell Nifty Near-Month Future (e.g., current month expiry).
• The Play: You capture the difference in the roll-over premium. On expiry day, the near-month futures converge to spot. If the far-month futures carry an exaggerated premium, the spread widens, allowing you to square off for a profit.
• Margin benefit: Exchange margins are significantly reduced (often by 80%) because you hold a fully hedged calendar position.

In the next part, we cover equity cash breakouts and Margin Trading Facility (MTF) leverage.

Proceed to Part 15: Equity Cash & MTF Swing Trading →