Importance of Premium & Discount in Futures

Hi All !

Can anybody help me to understand the importance of Discount & Premium in Futures,by answering the following questions.

1) Market is in the downtrend,Future is in the premium.Then what it indicates? Any likely change in the direction.?

2) Market is in an uptrend,but futures are trading at discount,what does it indicate?

3)Should we relate this premium or discount to Open interest to guage the direction?


Thanking you.

Seniors plz En-light Us with above questions....

Brother... I am just a learner, therefore, please also wait for the learned ones for their guidance...though...whatever little i have understood is given...

I have given replies against your questions.

The premium u mention is called contango. It is normal for non perishables to trade at contango but contango should not exceed the cost of carry. A very high contango indicates a perception of supply surplus.

The opposite condition is called backwardation, which may indicate a shortage in the underlying.

Please understand nothing can accurately predict the direction.

Allright. This is another 'lagging indicators' which traders use. Until and unless one does not stop using lagging indicators, success is far away in future trading.

It is not even an indicator. Discount or premium represent nothing. A top discretionary trader in whose trading account money flow effortlessly and at will does not have an idea about discount/premium in cash vs futures market.

Dont believe me. Try it your self. Make a journal in word and record the discount/premium between nifty future and nifty every day. Watch and record it for 6 months. Try to detect any meaningful pattern. Try to see whether you can anticipate the market using that data.

Really wonder why channels give regularly "Discount/ Premium" of Futures
over Spot.They have SOME meaning on expiry date.Instead they can give
change of Futures over last date just as they give in case of Sensex and
Nifty.

When any market moves, it generates lot of data (OHLC, volume) on different Time frames. Using mathematical and statistical tools like addition, subtraction, multiplication, correlation etc we humans give meaning to that historical data.

All technical tools do the same thing- They perform mathematical calculations on historical data. Technical tools are product of higher PC processing power after 1980s.

Put/call options is another set of lagging indicators which traders use to predict nifty. Open Interest in call and puts depend on nifty movements, not the other way around.

Coming to main point about business channels, business channels are left brain analysts. They will analyse the data, flash the breaking news, gives a viewer a logical reason why did the market rise or fall- All these processes generate TRP, attract Ad revenues, pays salaries to employees, produce net profit- The art of running a business.

Are business Channels great traders? No. They are great analyst but not great traders.

Is analysis and trading same or different- They are poles apart.

If at any point in life, you happen to meet a top millionaire trader on CME, NYSE, LSE, euronext trading floor- the mecca of global trading, ask the guy why did you took this particular short trade in morning. He will have hard time to give you logical reasons.

More or less he will say he feels that way and with 90% accuracy rate, the money will flow in his trading account effortlessly- subconscious competence.:thumb:

If trading was so easy to simply look out for discount/premium, any one would have been a millionaire. The irony is trading is not that difficult except the complications which we humans have introduced. One needs to look at the right way to correctly read the markets.

Thanks for the enlightening info, I am pulling the cord of my Tata Sky now