Do you sometimes think that the market index is going to rise? That you could make a profit by adopting a position on the index?
How does one implement a trading strategy to benefit from an upward movement in the index? Today, you have two choices:
1. Buy selected liquid securities, which move with the index, and sell them at a later date: or, 2. Buy the entire index portfolio and then sell it at a later date.
The first alternative is widely used – a lot of the trading volume on liquid stocks is based on using these liquid stocks as an index proxy.
However, these positions run the risk of making losses owing to company–specific news; they are not purely focused upon the index. The second alternative is cumbersome and expensive in terms of transactions costs.
How do we actually do this?
When you think the index will go up, buy the Nifty futures. The minimum market lot is 200 Nifties. Hence, if Nifty is at 1200, the investment is done in units of Rs.240,000. When the trade takes place, the investor is only required to pay up the initial margin, which is something like Rs.20,000.
Hence, by paying an initial margin of Rs.20,000, the investor gets a claim on the index worth Rs.240,000. Similarly, by paying up Rs.200,000, the investor gets a claim on Nifty worth Rs.2.4 million.
Futures are available at several different expirations. The investor can choose any of them to implement this position.
The choice is basically about the horizon of the investor. Longer dated futures go well with long–term forecasts about the movement of the index. Shorter dated futures tend to be more liquid.
How does one implement a trading strategy to benefit from an upward movement in the index? Today, you have two choices:
1. Buy selected liquid securities, which move with the index, and sell them at a later date: or, 2. Buy the entire index portfolio and then sell it at a later date.
The first alternative is widely used – a lot of the trading volume on liquid stocks is based on using these liquid stocks as an index proxy.
However, these positions run the risk of making losses owing to company–specific news; they are not purely focused upon the index. The second alternative is cumbersome and expensive in terms of transactions costs.
How do we actually do this?
When you think the index will go up, buy the Nifty futures. The minimum market lot is 200 Nifties. Hence, if Nifty is at 1200, the investment is done in units of Rs.240,000. When the trade takes place, the investor is only required to pay up the initial margin, which is something like Rs.20,000.
Hence, by paying an initial margin of Rs.20,000, the investor gets a claim on the index worth Rs.240,000. Similarly, by paying up Rs.200,000, the investor gets a claim on Nifty worth Rs.2.4 million.
Futures are available at several different expirations. The investor can choose any of them to implement this position.
The choice is basically about the horizon of the investor. Longer dated futures go well with long–term forecasts about the movement of the index. Shorter dated futures tend to be more liquid.