What are Nifty Future Contracts?

Nifty futures are a derivative contract, meaning that they derive their value from the behavior and assets it underlying. The Nifty50 index is the underlying asset of Nifty futures. The futures contract's value will increase if the index is valued higher. The Nifty futures contract will also drop if the Nifty index falls. Nifty50 futures give either the buyer or seller the right to trade stocks on the Nifty50 index at a fixed price on a future date. It is one of India's most liquid futures contracts, making it the most traded.

There are two types Nifty Options: put and call. Nifty calls give traders the opportunity to purchase an index with Nifty security at a predetermined value and within a specified timeframe. A Nifty put, on the other hand, gives trader the opportunity to sell Nifty indexes at a predetermined price within a specified timeframe.

What is the Nifty Futures contract?

Without explaining the workings of Nifty futures, it is difficult to understand what they are useful for. Here's an example. Let's say Amrita expects Nifty to rise from the current trading price of Rs10,700. She can purchase 75 shares by placing a margin at a fraction of the contract cost. These shares are now available to Amrita from Bharat for Rs10,000.

Let's assume Amrita was right and the shares' performance rises to Rs10 800. Amrita can now purchase shares from Bharat for Rs10 700 and resell them at Rs10 800 because she used a Nifty Call. She will receive Rs100 in options premium income and 75 shares, which adds up to Rs7500 from the sale. Bharat can sell Nifty futures to Amrita at Rs10,000. However, each share she buys will incur a Rs100 loss.

The Key Features of Nifty Futures

These are the key features of Nifty Futures.

  • - Trading symbol for Nifty Futures: NIFTY. Equity Derivative
  • Type of instrument: Index Futures
  • - Current Lot Size: 75 Shares/Units
  • SPAN Margin (NIFTY NSE: 5%)
  • - Exposure Margin, NIFTY NSE: 3%
  • - Value (Lot size): Rs5,00,000.
  • - NIFTY 50 Index - The Underlying Asset

Tips for Trading With Nifty Futures

These are some helpful tips for trading Nifty Futures.

  • Consider Your Position Leveraged:Nifty futures positions can be leveraged as all futures positions. If you purchase a Nifty lot within the next month, you get a 10% margin on normal trades and a 5% margin on intraday trades. Both profits and losses will be multiplied by leverage. Avoid the dangers of leverage by setting profit targets and, most importantly, stopping losses.
  • Examine the Spread Over Spot. Before trading in Nifty Futures it is important to carefully assess the spread over the spot price to understand why it exists. Even if the spread appears to be very high compared to spot price, don't rush to buy Nifty Futures lots. Overpricing is a common cause of this spread. It might be tempting to buy Nifty futures at a discount, but this could be due to aggressive selling.
  • Study open interest data: It is a good idea to examine open interest data before you take a position in Nifty futures. This will allow you to see the accumulation of trends. This will help you understand the direction of open interest, whether it is going in the long or short term. This will help you make a better investment decision.
  • Empathize With the Counterparty: When you purchase a Nifty futures contract, remember that someone is selling these shares to you. Based on the open interest data, this person could be a trader or hedger. Understanding the intentions of your seller will allow you to determine why your shares have been priced as they are. This will give you more clarity about your decision.

Track additional costs: When you trade with Nifty futures there are statutory as well as brokerage fees. These costs can make a big difference in your breakeven. Not to be confused with capital gains and capital losses, profit or loss from Nifty futures can be treated as capital gain or loss. Capital gains from market instruments have tax implications, which is an additional cost. These additional costs can help you save money over the long-term.

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