Q: Practical Aspects in Cash-Future Arbitrage

[DWeeP]

Hi all,

Cash-Future arbitrages seem lucrative to me.

Strategy in Short: When there is significant price difference in prices of future and stock of same stock, buy stocks and short futures in equal amount. At expiry when spot=future, exit both positions. Difference is profit.

Significant difference means more than sum of risk free interest rates and transaction costs.

This means guaranteed profit.

Known Limitations:

- high capital requirement, transaction costs
- limited opportunities


Are there any practical difficulties in this strategy except those listed?
If not why most of traders don't use this strategy?

 

[Smart_trade]

Hi all,

Cash-Future arbitrages seem lucrative to me.

Strategy in Short: When there is significant price difference in prices of future and stock of same stock, buy stocks and short futures in equal amount. At expiry when spot=future, exit both positions. Difference is profit.

Significant difference means more than sum of risk free interest rates and transaction costs.

This means guaranteed profit.

Known Limitations:

- high capital requirement, transaction costs
- limited opportunities


Are there any practical difficulties in this strategy except those listed?
If not why most of traders don't use this strategy?

Most of the time such arbitrage gives you a return of 6-8 % er annum and after considering brokerage and taxes, the rate of return drops further.....not worth all the troubles.

Smart_trade

 

[DWeeP]

Thanks for reply Smart_trade

Current Risk Free Interest Rate = ~9% + ~1% Transaction + Brokerage = 10 % (PA)
Hence, if current month futures are at premium of 1% (i.e. 12% PA), I can go for arbitrage.
Is it true?

We just need to lower cost of funds - for eg. using Demat holdings as collateral for futures margin, trading with low brokerage like Zerodha.
That will make this strategy more powerful.

BTW where can I get Future vs Spot charts ?

 

[praveen98]

Hi Dweep,
For future-spot charts you can visit nseindia.com , below the default nifty chart on home page you can find technical charts....after clicking that link you can select the fo in first drop down box,futstk in 2nd drop down box then type in the name of the stock and click find and then click on the code given by nse site and then select date and time frame and click on compare and select particular underlying in EQ segment.....you can get both the future and underlying price chart in line chart ....
All the best,
praveen

 

[anuragmunjal]

Thanks for reply Smart_trade

Current Risk Free Interest Rate = ~9% + ~1% Transaction + Brokerage = 10 % (PA)
Hence, if current month futures are at premium of 1% (i.e. 12% PA), I can go for arbitrage.
Is it true?

We just need to lower cost of funds - for eg. using Demat holdings as collateral for futures margin, trading with low brokerage like Zerodha.
That will make this strategy more powerful.

BTW where can I get Future vs Spot charts ?

even if u get 12% PA, after deducting brokerage and various charges, do u think it wd be worth it. u also have to account for slippage in this.

on expiry day, generally there is a small difference between cash and futures prices, in case u are not getting a decent premium in next month over this month, how will u square off ur position? the futures wd settle at the last half hour average of cash prices, not the last traded price in cash.

 

[DWeeP]

even if u get 12% PA, after deducting brokerage and various charges, do u think it wd be worth it. u also have to account for slippage in this.

on expiry day, generally there is a small difference between cash and futures prices, in case u are not getting a decent premium in next month over this month, how will u square off ur position? the futures wd settle at the last half hour average of cash prices, not the last traded price in cash.

This is exactly I was worried about.
I have never held on to a position till expiry time hence was unaware of average price of settlement. So, any way around this?

BTW if i can get 12% PA risk free, I'd definitely be interested.

Thanks to praveen98 I plotted Spot vs Future chart.

 

[anuragmunjal]

This is exactly I was worried about.
I have never held on to a position till expiry time hence was unaware of average price of settlement. So, any way around this?

BTW if i can get 12% PA risk free, I'd definitely be interested.

Thanks to praveen98 I plotted Spot vs Future chart.

though I do not think that u are getting into a very lucrative business, I can suggest 'a way around'....
devide the total number of shares held in cash by 30 and sell off that number on every one minute interval starting frm 3.00 pm till 3.30 on expiry day.
let ur futures expire.
u can also devide by 60 and sell at every half minute interval starting from 3 pm on expiry day...again let the futures expire.

regards

 

[PartTime_Trader]

though I do not think that u are getting into a very lucrative business, I can suggest 'a way around'....
devide the total number of shares held in cash by 30 and sell off that number on every one minute interval starting frm 3.00 pm till 3.30 on expiry day.
let ur futures expire.
u can also devide by 60 and sell at every half minute interval starting from 3 pm on expiry day...again let the futures expire.

regards

Further if you automate this process can do that even every 10 seconds


Cheers
::thumb::

 

[DWeeP]

though I do not think that u are getting into a very lucrative business, I can suggest 'a way around'....
devide the total number of shares held in cash by 30 and sell off that number on every one minute interval starting frm 3.00 pm till 3.30 on expiry day.
let ur futures expire.
u can also devide by 60 and sell at every half minute interval starting from 3 pm on expiry day...again let the futures expire.

regards

Smart!
But this would rise brokerage as my broker charges per order.

BTW I just found this on NSE Website:

Futures Contracts on Index or Global Index Individual Security - Daily Settlement - Closing price of the futures contracts on the trading day. (closing price for a futures contract shall be calculated on the basis of the last half an hour weighted average price of such contract)

Final Settlement - Closing price of the relevant underlying index / security in the Capital Market segment of NSE, on the last trading day of the futures contracts.

Source:

http://www.nseindia.com/products/content/derivatives/equities/settlement_price.htm

Pls confirm.

 

[anuragmunjal]

Smart!
But this would rise brokerage as my broker charges per order.

BTW I just found this on NSE Website:

Futures Contracts on Index or Global Index Individual Security - Daily Settlement - Closing price of the futures contracts on the trading day. (closing price for a futures contract shall be calculated on the basis of the last half an hour weighted average price of such contract)

Final Settlement - Closing price of the relevant underlying index / security in the Capital Market segment of NSE, on the last trading day of the futures contracts.

Source:

the settlement of futures is always calculated on the wieghted average of last half hour trading in cash.
on some occasions , u may get 'ulta badla' or same prices in cash and future.. such occasions are rare. more often than not,
there is a small difference (generally of .25% or thereabouts) in cash and futures prices on the last day. if u start giving back this small %age back every month, trading by ur system wd not make sense as u are in any case aiming fr a 12% or thereabouts.
the only way to square off is what I have shown u, if u leave ur position till the last day.

regards