The derivative refers to the financial instrument which mainly gets its value from the underlying assets. Therefore, Nifty futures is also a component of a derivative, and its underlying asset is the Nifty50 index. The increase in the index value is likely to increase the futures contract value and vice versa.
The bank Nifty futures contract grants the seller or buyer the option to purchase or sell a derivative on Nifty50 index in the future at a determined price. This futures contract holds significant importance in the trading market, particularly as the Nifty50 is among India’s most actively traded and liquid futures contract. Further insights into the Nifty futures can be explored to enhance our understanding.
What is included in the Nifty futures contract?
You will find two options included in the Nifty Futures contract:
Using the call options, the owner of the contract will have the option to purchase the Nifty index at a certain time and price as stated in the futures contract. You will not be obliged to make use of the option.
The put option works differently compared to the call option. So, in this case, the owner of the contract will have the choice to sell the Nifty index but won’t be obliged to use the option.
How to trade in bank Nifty futures?
The NIFTY index is highly attractive to traders seeking to generate quick profits, as it is more prone to sudden price jumps. This attribute also makes it more alluring to intraday traders, as achieving a profit margin of 2-3% per day is considered a good trade. However, this same volatility makes Bank Nifty future exceedingly risky. In other words, the price is likely to fluctuate frequently, and failure to keep up can lead to amplified losses. Hence, it is crucial to exercise caution while trading in Bank Nifty and Bank Nifty options.
Trading in the Nifty mainly implies investing in stocks comprised of the Nifty index. A trader or investor has several ways to invest in Bank Nifty future.
- Spot Trading/Delivery Trading – This is the simplest version of trading. This type of trading implies purchasing one or more stocks from the nifty50 index. You must purchase a stock at a specific price to sell it after an increase in the price to generate good returns from the spot market. It is similar to buying a stock in the stock market; most investors prefer this method.
- Derivatives Trading – Trading in derivatives involves the value of the derivative derived from an underlying asset, hence the name ‘derivative.’ In this type of trading, traders speculate on whether the price of a particular asset will rise or fall based on market factors influencing its value. To do this, they purchase a contract that grants them the right to buy or sell the asset at a previously agreed price on a future date. Additionally, exchanges offer the option to trade Nifty derivative contracts, which are further divided into two categories.
With this in mind, let’s explore some strategies for trading in this market.
Understand thoroughly how futures and options work
Futures are more complicated than other financial products like equities and mutual funds. For someone making their first investment in stocks, trading in futures might be difficult. If you wish to start trading futures, you must be aware of the dangers and expenses involved and how futures operate.
Get a fix on your risk appetite
While everyone wants to profit from the markets, futures trading also carries the risk of financial loss. Knowing your risk tolerance is crucial before learning how to invest in the futures. You should be aware of how much money you can afford to lose and whether it will impact your way of life.
Determine your approach to trading
Deciding on one’s future trading approach is crucial. On the basis of your knowledge and investigation, you could wish to buy futures. To assist you with the same, you might also engage an expert.
Check the data on an open interest
Performing scientific data examination prior to taking a position in Nifty futures is always beneficial. Engaging in thorough data analysis may result in profitable trades in Nifty. By examining the open interest in Nifty futures or its trends, you can determine whether an open interest is increasing on the short or long side. This will provide you with an informed perspective on the direction of Nifty, enabling you to make more informed decisions.
Avoid getting into the liquidity trap
If you prefer trading in the liquid markets, then Nifty is an ideal choice. Nifty futures are highly liquid contracts, with liquidity seldom being a significant issue. However, there may be instances when Nifty futures encounter a liquidity trap. For instance, during the expiry day, once the rollovers have been substantially completed, you will typically notice a drop in trading volumes in Nifty futures. Additionally, in a stock market which is experiencing a steep decline, the spreads are more likely to widen considerably, thereby increasing the trading risk associated with Nifty futures.
Multiple margin implications
When dealing with Nifty futures, both buying and selling can result in the linear position that has the potential to yield unlimited losses and profits. While trading Nifty, it is crucial to implement stop-losses, and understanding margins is equally essential. Firstly, the initial margin is required when opening a position, including the VAR and ELM margins. Currently, brokers are obligated to collect these margins and hence, ELM will not be optional any longer. Secondly, you might have to pay market to market margins regularly, and this is determined depending on the price movement. These margins have the capital allocation implications.
Futures contracts provide several advantages to investors, especially speculative ones. These contracts, however, frequently include high levels of leverage and big contract sizes, which can result in substantial losses even with slight changes in the market. Therefore, before investing in Nifty futures, investors must perform adequate due research and create a well-thought-out plan. Thanks to this strategy, they can better comprehend the benefits and hazards of such investments.