Nifty Futures - Calendar Spreads

trader15

Well-Known Member
#1
This thread will discuss possible strategies to do calendar spread in nifty futures.

NOTE: THIS THREAD IS NOT ABOUT OPTIONS SPREADS OF ANY KIND : CALENDAR OR ANY. PURELY FUTURES CALENDAR SPREAD THREAD.

I was exploring various option spreads strategies and was checking the margin requirements for spreads on zerodha site, when i came across the nifty futures calendar spread.

What enticed me towards this was :

a) Low margin requirement : 6K-7K
b) Aligned towards positional strategy
c) Lack of any information available on this topic
d) Relatively little risk while trading : As you know the risk you are entering into : i.e. the spread

Have started off by taking the data for last 2 weeks for Oct and Nov futures. As first analysis steps, I'm going to analyze:

a) Coorelation of difference between Oct and Nov Futures with spot
b) Spikes which lead to break of corelation : i.e. the trade opportunities
 
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trader15

Well-Known Member
#2
Basics of Futures Calendar Spreads:

A calendar spread is a contract where you buy/sell a particular month contract (Futures or Options) and sell/buy (take an opposite position) of the same contract of a different month.

Why do calendar spread:

Assume that you see Nifty February futures trading at 5900 and March futures trading at 5960, you feel that this difference of 60 points between both the months is quite a bit and this will reduce to 30 points in the next few days, how do you profit from this idea? The idea is to profit without taking any naked directional risk, i.e., immaterial of the market going up or down, you should be able to profit if this difference between both the futures reduces from 60 to 30 points.


Two key aims:

1. Increase In Profit Avenues and
2. Lowering of Margin Requirement and risk.
 
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trader15

Well-Known Member
#3
In next few posts, I'm putting across basics of futures spreads .. So all of us are on same page on fundamentals.

Would request sharing knowledge from senior folks or who have tried future spreads or even done paper trades.. Would help in understanding the dynamics of future spreads in constructive way.
 
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trader15

Well-Known Member
#4
Increasing Avenues of Profit

While going long or short futures contracts outright only earn you profits when the futures contracts you traded move in your predicted direction, futures spreads are really capable of profiting in 5 different ways:

1. When the long leg rises and short leg falls. This usually happens when the basis is extremely large on the far term futures contracts and the underlying asset moves up slowly.

2. When the long leg rises and the short leg remained unchanged.

3. When the long leg rises and short leg rises at a lower rate. This is usually what happens when near term futures with higher volatility is bought and far term futures with lower volatility is shorted.

4. When the short leg falls faster than the long leg.

5. When the long leg remains unchanged and short leg falls.

As you can see above, futures spreads greatly increases the avenues of profits even though it does not have the explosive potential of outright futures speculative positions.

In fact, all of the above 5 points say only one thing and that is, futures spreads profit through the price difference of the long and short leg instead of the price action of the underlying itself!
 

trader15

Well-Known Member
#5
Lowering Margin and Risk

Apart from increasing the avenues of profit, futures spreads are valued for their ability to limit risk. Futures spreads are really trading the difference in price (the "Spread") between the long and short legs and such price difference tends to trade within a determinable range! That's right, this makes trading futures spreads a lot more predictable and subject the futures trader to much lower risk.

Apart from lowering the risk involved, putting on a spread also decreases your initial margin requirement dramatically due to developments in SPAN Margin. You could pay up much lesser initial margin for a futures spread versus an outright position. This will enable you to put on a lot more positions for greater ROI!

In fact, futures spreads are so effective that most futures brokers quote futures spread position directly for trading as if it is one asset on its own!

Margins Required:

In a position like this there is hardly any market risk and because of this the margin requirement to setup a calendar spread like this as per exchange norms will be very less. Just to give you an example, the margin required for 1 lot of Nifty is around Rs. 28000, so in the above case since you have 2 lots the margin requirement should ideally be Rs. 56000.

But becaue this is a calendar spread the margin requirement for both the positions together due to the reduced risk is only Rs. 6000 and not Rs. 56000.
 

trader15

Well-Known Member
#6
Within calendar spread, there are two types of positions you can take: Bull or bear

Lets get started with Bull Spreads.

Bull Spread:

Bull Spreads are futures positions consisting of being long a near term contract and then short a further term contract, profiting when the price of the underlying asset goes up.

So for bull spread, you will buy Oct Series and Sell Nov Series Nifty Futures

When to take Bull Spread and how do you benefit from same:

When you are bullish on an asset, you would typically go long on its futures contracts in order to reap a leveraged profit when the price of the underlying asset rises. This is known as an "Outright Position". A Bull Spread is formed when you go short on longer term futures contracts on the same underlying asset on top of the nearer term long futures position that you are already holding.

Actually, when you place a futures spread, you are taking on the risk in the pricing difference between the long and short futures contracts rather than a simple directional risk in one futures contract. This puts you in the place of both a speculator as well as a hedger, speculating on the price difference and hedging against risk at the same time, which is now known as taking the position of a "Spreader"

How do bull spread make money:


Unlike outright futures trading positions which make a profit only when the futures contracts that you own appreciates in value, futures bull spreads profit when:

1. When the long leg rises and short leg falls.

2. When the long leg rises and the short leg remained unchanged.

3. When the long leg rises and short leg rises at a lower rate.

4. When the short leg falls faster than the long leg.

5. When the long leg remains unchanged and short leg falls.

When To Use Futures Bull Spreads

1. When the price spread between near term futures contracts and further term futures contracts are expected to narrow down in a normal market.

2. When the price spread between near term futures contracts and further term futures contracts are expected to widen in an inverted market.

3. Any market condition which leads to near term futures contracts rallying against further term futures contracts. An example of such a situation includes a short term lack of supply which pushes up short term demand per unit and price.
 

trader15

Well-Known Member
#7
BEAR SPREAD

Bear Spreads are futures positions consisting of being short a near term contract and then long a further term contract, profiting when the price of the underlying asset goes down

So you sell Oct Series and Go Long in Nov Series Nifty Futures.

How Does Bear Spreads Make A Profit?
Unlike outright short futures positions which make a profit only when the futures contracts that you own depreciates in value, futures Bear Spreads profit when:

1. When the long leg rises and short leg falls.

2. When the long leg rises and the short leg remained unchanged.

3. When the long leg rises and short leg rises at a lower rate.

4. When the short leg falls faster than the long leg.

5. When the long leg remains unchanged and short leg falls.

Yes, even though Bear Spreads profit primarily from a drop in value on the underlying asset, making the near term futures contracts depreciate faster than the further term ones, any of the above 5 scenarios can arise from technical reasons as well. Technical reasons being changes in the price of the futures contracts which is not directly due to a change in price of the underlying asset.

When To Use Futures Bear Spreads

1. When the price spread between near term futures contracts and further term futures contracts are expected to widen in a normal market.

2. When the price spread between near term futures contracts and further term futures contracts are expected to narrow down in an inverted market.

3. Any market condition which leads to near term futures contracts dropping against further term futures contracts. An example of such a situation includes a short term lack of demand on the underlying asset which pushes down prices.
 

trader15

Well-Known Member
#8
Ok now this is enough for the theory gyan. Now we will focus on examples on nifty futures to understand the concepts and brainstorm strategies.

(I know there may be questions around how to place spread orders and who all allow this. Any broker providing access to NOW should be providing this. If anyone wants to get step by step process, zerodha has listed it on its site. )
 

DanPickUp

Well-Known Member
#9
Ok now this is enough for the theory gyan. Now we will focus on examples on nifty futures to understand the concepts and brainstorm strategies.

(I know there may be questions around how to place spread orders and who all allow this. Any broker providing access to NOW should be providing this. If anyone wants to get step by step process, zerodha has listed it on its site. )
Yes, it is surely enough copy past post. Any thing knew you can come up with which was not posted in the past in the forum??
 

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